Resumen de Dividend, liquidity and firm valuation: evidence from China AB share markets

Mao Liang Li, Chin Man Chui, Chang Qing Li

• This article examines the relevance of cash dividend from the theoretical and empirical perspective by taking market liquidity into account. We construct an economic model that demonstrates that the effect of cash dividend on firm valuation depends on the status of market liquidity. The hypotheses derived from our model are strongly supported by data from A- and B-share markets in China. Our results from the dynamic panel regression demonstrate that the price premium of B-share relative to A-share is positively correlated to the level of cash dividend, and this relationship becomes even stronger when the relative liquidity of B-share is in a low status. In addition, this price premium is positively affected by the relative liquidity and firm profitability. The results are robust under alternate liquidity and dividend measures. The subsequent analysis based on the event study approach further reveals a more positive (negative) response to the announcement of cash dividend initiation (omission) in the B-share market. In particular, this positive response on the initiation is negatively correlated with the relative liquidity.