Dividend regulation and cost stickiness: evidence from a quasi-natural experiment

Abstract

This paper aims to examine the effect of dividend regulation on cost stickiness (i.e. the asymmetric change in firm expense between sales increase and sales decrease) and explore the underlying mechanism. Based on the quasi-natural experiment of the Guideline for Dividend Policy of Listed Companies issued by the Shanghai Stock Exchange (SSE) in 2013, the authors employ a difference-in-difference model to investigate the impact of dividend regulation on cost stickiness. The authors find that the cost stickiness of treatment group firms has decreased significantly when compared with control group firms after the dividend regulation. Moreover, this effect is more pronounced among firms in lower marketization regions, in lower competition industries and those with less analyst coverage and lower cash flow levels. Further analyses show that dividend regulation reduces the cost stickiness of firms by mitigating agency problems. Finally, the conclusion holds after several robust tests, including controlling for firm fixed effect, propensity score matching (PSM), placebo test and reconstruction of expense variable. This paper confirms that dividend regulation serves an important role in corporate governance, which reduces firms' agency costs and thereby decreases cost stickiness. The conclusions shed light on the dividend policies of listed companies and capital market regulation in the future.

Keywords

• dividend regulation
• cost stickiness
• agency cost
• corporate governance