Information content of unexpected dividends under a semi-mandatory dividend policy: An empirical study of China

• China has a semi-mandatory dividend system for SEO firms.
• SEO and non-SEO firms react differently to dividend change.
• We also consider additional burden on SEO firms.
• Findings are consistent with the dividend signaling theory.
• They are also consistent with the negative effects of SEOs.

We examine the information content of unexpected dividend changes under China’s unique semi-mandatory dividend policy, which requires firms to pay a minimum amount of cash dividends before they can undertake seasoned equity offerings (SEO). The cumulative abnormal returns (CARs) are significantly positive in response to unexpected dividend increase for non-SEO firms, but they are not significantly different from zero for SEO firms. For non-SEO firms, there is a significant positive relation between future earnings and unexpected dividend increases, but the relation is not significant for SEO firms. However, when considering additional refinancing costs for SEO firms caused by the mandatory dividend policy, higher dividend payments are associated with lower future earnings. Overall, our findings are consistent with both the dividend signaling theory and the negative effects of SEOs on a firm’s value.