1. Does Conservative Accounting Matter to Cash Dividend Policy William Bradford University of Washington, Seattle Chao Chen Fudan University Song Zhu Beijing Normal University

2. The story Chinese listed firms on average paid out just 22% of their earnings in 2001-2006 period. Their average dividend yield was as lower as 0.70% in the this period. The Chinese stock market is considered as an emerging market with weak shareholder protection due to low cash dividends. However, high dividend may affect the interest of bondholders.

3. The story Very few Chinese listed firms repurchased their stocks prior to 2008. Stock dividends are not unusual. No bond covenant restriction of paying dividend in our studying period. Earnings management is a wide spread phenomenon of Chinese listed firms. SOEs have less capital constraint relatively to NSOEs.

4. Motivation Without the restriction by corporate bond covenants of Chinese listed firms, does accounting conservatism influence corporate dividend policy? Can conservative accounting reduce dividends and thereby protect creditor claims and mitigate the creditor-shareholder agency conflict? SOEs adopt less conservative accounting than NSOEs, do they pay more cash dividends?

5. Main Findings Conservative accounting reduces the payment and the probability of overpayment of cash dividends of listed firms in China, and thus mitigates the stockholder- creditor agency problem. Even though the SOEs are more conservative than NSOEs due to political costs, lenders (mostly banks) are less concerned with downside risk for SOEs than for NSOEs, which will result in fewer restrictions on cash dividend payout. Due to the less capital constraint, SOEs are more likely and pay more cash dividends than NSOEs.

6. Hypotheses  H1: Ceteris paribus, firms with more conservative accounting are less likely to pay cash dividends to shareholders.  H2: Ceteris paribus, firms with more conservative accounting tend to pay less cash dividends to shareholders.

7. Hypotheses  H3: Ceteris paribus, firms with more conservative accounting are less likely to overpay cash dividends to shareholders.  H4: The influence of conservative accounting on dividend policy is smaller for state-owned firms than for non state-owned firms.

8. Samples and Data Source The new accounting standards became effective in China on January 1, 2007. The corporate bond new issues were started in 2007. The ownership reform to convert non-tradable shares to tradable shares was implemented for a small group of companies in 2005, then gradually expanded to most of the companies in 2007.

9. Samples and Data Source Eliminate those sample firms without ultimate shareholder information; with missing financial data; listed less than one year; in the financial industry; and with negative earnings but paid dividend.

10. Samples and Data Source The final samples include 4,458 firm-year observations from 2001 to 2006. Cash dividend policy data and other financial data are collected from the Wind/CSMAR database The information about ultimate shareholders is collected manually from annual financial reports.

11. Samples and Data Source Eliminate those sample firms without ultimate shareholder information; with missing financial data; listed less than one year; in the financial industry; and with negative earnings but paid dividend.

12. Cash dividend To pay or not to pay cash dividend Div: Div=1, if the firm paid cash dividend, 0 otherwise. The degree of cash dividend Payout: cash dividend per share / current year EPS Yield: cash dividend per share / stock price per share at the beginning year  Overpayment of cash dividend OverPay=1, if Payout > payout of the industry average OverYield =1, if Yield > yield of the industry average

13. Accounting conservatism Givoly and Hayn (2000) proposed accrual based measure of conservative accounting We follow the accrual measure used by Ahmend et al. (2002) and Ahmend and Duellamen (2007): Conserv= (Three-year cumulative accruals/year end total assets) * (-1), so the higher of this measure, the higher the accounting conservatism. Accruals of each year = earnings after extraordinary items + depreciation – cash flow from operation

14. Other measures Conserv > 0, the accounting is conservative Conserv <0, the accounting is aggressive Beatty et al. (2008) Khan and Watts (2009): Cscore M/B: The total market value divided by book value of equity at the end of the year

15. Table 1 Descriptive Statistics VariablesNMeanSD25%50%75% Div44580.4390.496011 Payout44580.2240.323000.411 Yield (%)44580.6991.217000.983 Cashdiv/Asset44580.0090.016000.013 Conserv44580.0130.189-0.0820.0130.109 Cscore44580.0760.0350.0510.0780.101 M/B44583.2113.0731.5352.3153.691 Grow44580.2490.675-0.0190.1380.336 CF44580.0500.0790.0100.0500.093 ROE (%)4458-0.40031.5911.3154.9408.924 Manown (%)44580.0290.1220.0010.0090.027 Stockdiv44580.0980.298000 Lev44580.5000.1840.3730.5100.629 Age44587.5482.724579 Size445821.2120.94420.60121.15521.813 V44580.4220.1630.2890.4070.550 CV44580.8470.2510.72811 State44580.7640.424111

16. Table 1 Descriptive Statistics(for SOEs) SOEs VariablesNMeanSD25%50%75% Div34060.4750.499001 Payout34060.2520.336000.451 Yield (%)34060.7911.288001.126 Cashdiv/Asset34060.0100.017000.016 Conserv34060.0130.181-0.0810.0120.104 Cscore34060.0740.0360.0490.0770.101 M/B34063.0332.7231.5232.2883.550 Grow34060.2270.591-0.0090.1390.328 CF34060.0540.0770.0140.0540.096 ROE (%)34060.77827.1351.3555.0198.830 Manown (%)34060.0270.1060.0010.0090.027 Stockdiv34060.0940.293000 Lev34060.4850.1830.3570.4970.618 Age34067.3992.732579 Size340621.3030.93520.68221.24121.879 V34060.4530.1610.3180.4550.581 CV34060.9050.2060.99911

17. Table 1 Descriptive Statistics(for Non-SOEs) NSOEs VariablesNMeanSD25%50%75% Div10520.3200.466001 Payout10520.1350.258000.178 Yield (%)10520.4040.885000.398 Cashdiv/Asset10520.0050.011000.005 Conserv10520.0130.214-0.0870.0180.125 Cscore10520.0800.0330.0570.0820.104 M/B10523.7853.9491.5902.4304.373 Grow10520.3200.892-0.0640.1310.376 CF10520.0360.085-0.0040.0380.081 ROE (%)1052-4.21942.7511.1134.6609.358 Manown (%)10520.0370.16400.0060.026 Stockdiv10520.1120.315000 Lev10520.5480.1760.4280.5560.658 Age10528.0312.6416810 Size105220.9160.91020.36120.89521.545 V10520.3200.1260.2420.2900.379 CV10520.6590.2900.4450.6680.960

18. Table 2 Spearman vs. Pearson Correlation Matrix DivPayoutYield Cashdiv/Asset ConservCscore MB Div0.947*** 0.942*** -0.132*** -0.110***-0.123*** Payout0.784***0.940*** 0.947*** -0.111*** -0.150***-0.132*** Yield0.650***0.670*** 0.958*** -0.081*** -0.077***-0.193*** Cashdiv/Asset0.640***0.716***0.773***-0.115*** -0.189***-0.084*** Conserv-0.120***-0.072***0.001 -0.066***0.166***0.031*** Cscore-0.106***-0.174***0.005 -0.237*** 0.143*** 0.068*** MB-0.094***-0.079***-0.084*** -0.049*** 0.075*** 0.107***

19. Table 3 Mean Comparison of Fundamentals between Aggressive Accounting and Conservative Accounting NState LEV AllSOENSOE DumConserv 020670.7660.4660.4520.513 123910.7610.5290.5140.577 Diff0.005-0.063-0.062-0.064 t0.408-11.626***-10.068***-5.958***

20. Table 4 Mean Comparison of Cash Dividend Policy between Aggressive Accounting and Conservative Accounting N DivPayoutYield Cashdiv/Asset DumConserv 0 2067 0.4880.2440.694 0.010 1 2391 0.3960.2070.704 0.008 Diff0.0910.037-0.009 0.001 t6.174***3.846***-0.255 3.684***

21. Table 5 Mean Comparison of Conservatism for Firms with and without Cash Dividends N Conserv CscoreM/B Div 0 25010.0330.0794.597 1 1957-0.0120.0712.632 Diff 0.0460.0071.964 t8.128*** 7.166***6.330***

22. Table 6 Cash Dividend Payment and Accounting Conservatism VariablesConserv Age0.0050.007 0.006 0.007 (1.27)(1.44)(1.56)(1.42)(1.46)(1.48)(1.58)(1.50) PreDiv-0.063*** (-12.19) Div -0.051*** (-5.78) PrePayout -0.034*** (-3.79) Payout -0.032*** (-3.79) PreYield -0.013*** (-4.42) Yield -0.006** (-2.07) PreCashdiv/Asset -1.210*** (-6.60) Cashdiv/Asset - 1.075*** (-6.03) Size-0.013**-0.021***-0.019***-0.020***-0.015***-0.022***-0.021***-0.020*** (-2.41)(-4.07)(-3.31)(-3.73)(-2.60)(-4.03)(-3.57)(-3.70) LEV0.209***0.237***0.239***0.215***0.217***0.237***0.245***0.221*** (8.95)(9.79)(10.58)(9.12)(10.02) (10.40)(9.58)

23. Table 6 Cash Dividend Payment and Accounting Conservatism (Continued) VariablesConserv CF1.222***1.208***1.220***1.232***1.239***1.211***1.214***1.242*** (16.36)(16.21)(16.25)(15.93)(16.50)(16.30)(16.58)(16.61) Manown-2.952*-3.341*-3.239*-3.005*-2.490-3.190-3.406*-2.944 (-1.77)(-1.67)(-1.66)(-1.67)(-1.29)(-1.60)(-1.66)(-1.57) V-0.031-0.028-0.026-0.020-0.030-0.029 -0.020 (-1.22)(-1.05)(-0.96)(-0.74)(-1.15)(-1.07)(-1.11)(-0.75) CV0.000-0.001 -0.0000.001-0.001-0.002-0.001 (0.01)(-0.03)(-0.04)(-0.02)(0.03)(-0.05)(-0.08)(-0.06) State0.0140.014*0.0140.0130.014* 0.014 (1.62)(1.68)(1.56)(1.53)(1.69)(1.70)(1.62)(1.60) Grow-0.051***-0.055*** -0.057***-0.047***-0.054*** - 0.052*** (-5.58)(-5.36)(-5.33)(-5.43)(-4.49)(-5.38)(-5.02)(-5.24) Growsq0.012***0.013*** 0.014***0.012***0.013*** (6.89)(6.93)(6.91) (5.83)(6.97)(6.54)(6.84) IndsControl Obs.4458 Pseudo R20.3100.292 0.2980.3020.2910.2900.295

24. Table 7 Accounting Conservatism, Cash Dividend Payment Level and Ownership Structure VariablesExpsignDivPayoutYieldCashdiv/Asset Conserv−-1.036***-1.274***-0.272***-0.310***-0.722***-0.816***-0.013***-0.015*** (-2.70)(-3.20)(-10.86)(-9.24)(-15.10)(-12.35)(-16.01)(-16.83) State ＋ 0.0890.0110.051***0.039**0.119**0.087*0.002**0.001* (0.95)(0.09)(2.65)(2.03)(2.25)(1.70)(2.37)(1.67) State Conserv ＋ 0.1760.028***0.070***0.001*** (1.28)(3.74)(3.12)(3.01) Lev−-3.137***-3.166***-0.811***-0.816***-2.139***-2.152***-0.038***-0.039*** (-10.76)(-10.73)(-21.62)(-22.02)(-10.89)(-18.21)(-18.95)(-19.21) V?0.307 0.0580.059*0.288***0.291**0.008*** (1.22) (1.64)(1.67)(3.22)(2.01)(4.22)(4.24) CV?0.2170.2060.042*0.040*0.141*0.136*0.002 (0.95)(0.89)(1.73)(1.67)(1.92)(1.86)(1.40)(1.33) CF ＋ 4.256***4.174***0.788***0.774***3.126***3.088***0.053*** (5.13)(5.22)(4.97)(4.92)(8.72)(23.99)(7.56)(7.58)

25. Table 7 Accounting Conservatism, Cash Dividend Payment Level and Ownership Structure(continued) Variables Expsig n DivPayoutYieldCashdiv/Asset ROE ＋ 0.064***0.065***0.013*** 0.047*** 0.001*** (3.00)(3.05)(26.72)(26.76)(28.57)(28.58)(20.08)(20.12) Manown ＋ 0.788**0.808**0.187***0.190***0.423***0.431***0.008*** (2.30)(2.37)(5.22)(5.32)(3.60)(3.66)(2.92)(2.98) Age?-0.048*-0.050*-0.019*** 0.004 -0.000*** (-1.71)(-1.76)(-10.86)(-10.90)(0.89)(0.82)(-5.83)(-5.91) Size ＋ 0.728***0.727***0.155*** 0.599***0.598***0.007*** (12.55)(12.57)(18.70)(18.69)(19.65)(19.63)(17.81)(17.77) Predividend ＋ 1.770*** 0.547***0.546***0.725*** 0.547***0.548*** (8.51)(8.47)(30.28)(30.29)(30.94)(30.93)(9.82) Stockdiv?0.665***0.669***0.033***0.034***0.146***0.147***0.003*** (3.45)(3.50)(3.04)(3.09)(3.93)(3.98)(5.01)(5.07) IndsControl 4458 Pseudo R20.38820.38950.28740.28790.24380.24400.57500.5759

26. Table 8 Cash Dividend Policy and Accounting Conservatism - SOEs and NSOEs Variables SOENSOE DivPayoutYieldCash/AssetDivPayoutYieldCash/Asset Conserv-0.535**-0.247***-0.696**-0.012***-0.910***-0.380***-0.818***-0.015*** (-2.39)(-3.59)(-2.48)(-31.31)(-2.80)(-3.49)(-5.07)(-6.47) Lev-1.929***-0.815***-2.136***-0.039***-1.335***-0.738***-2.015***-0.033*** (-10.42)(-20.37)(-16.33)(-16.83)(-3.71)(-12.02)(-3.27)(-9.94) V0.0120.0280.161*0.007***0.788**0.267**1.078***0.013*** (0.06)(0.38)(1.83)(3.70)(2.47)(2.44)(5.38)(2.90) CV0.1930.087***0.306***0.003**-0.005-0.039-0.159**-0.001 (1.41)(3.00)(3.01)(1.98)(-0.02)(-1.10)(-1.98)(-0.64) CF2.509***0.727***3.063***0.052***2.732***0.936***3.079***0.051*** (5.14)(3.39)(4.93)(5.92)(12.18)(4.10)(4.41)(5.30) ROE0.036***0.014***0.053***0.001***0.023***0.010***0.030***0.000*** (5.06)(20.27)(20.34)(15.44)(3.77)(19.23)(21.61)(15.85) Manown0.428***0.174***0.376***0.008**0.4850.170**0.4200.006** (3.80)(16.23)(10.72)(2.16)(1.41)(2.04)(1.58)(1.99)

27. Table 8 Cash Dividend Policy and Accounting Conservatism - SOEs and NSOEs(continued) Variables SOENSOE DivPayoutYieldCash/AssetDivPayoutYieldCash/Asset Age-0.027*-0.018***0.010*-0.000***-0.040-0.021*** - 0.010*** -0.001*** (-1.77)(-8.87)(1.73)(-4.44)(-1.30)(-5.85)(-4.52)(-6.15) Size0.417***0.138***0.568***0.006***0.414***0.201***0.659***0.007*** (9.84)(16.73)(17.21)(15.18)(5.84)(9.88)(9.24)(9.48) Predividend1.067***0.521***0.709***0.537***1.061***0.631***0.758***0.589*** (9.60)(26.53)(27.07)(10.15)(6.86)(17.75)(12.34)(6.77) Stockdiv0.308**0.0090.082**0.002***0.581***0.059**0.214***0.004*** (2.11)(0.96)(2.21)(3.06)(3.40)(1.99)(3.04)(3.80) IndsControl Obs.3406 1052 Pseudo R20.38560.27050.23950.52440.39020.33780.25570.6847

28. Table 9 Probit Model for Accounting Conservatism, Cash Dividend Overpayment, and Ownership Structure VariablesExpsignOverPayOverYield Conserv−-0.514***-0.585***-0.366**-0.340** (-3.44)(-3.99)(-2.39)(-2.07) State ＋ 0.187***0.163**0.143**0.152*** (2.66)(2.03)(2.23)(2.76) State Conserv ＋ 0.0520.019 (0.86)(0.22) Lev−-1.884***-1.893***-1.882***-1.879*** (-10.82)(-10.81)(-8.54)(-8.24) V?0.0930.0940.017 (0.46) (0.10) CV?0.0820.0790.1230.124 (0.87)(0.84)(0.97)(0.96) CF+2.157***2.133***2.485***2.495*** (5.61)(5.59)(13.07)(12.92) ROE+0.027*** 0.030*** (7.22)(7.27)(6.05)(6.08) Manown+0.340*0.345*0.0660.064 (1.73)(1.76)(0.26)(0.25)

29. Table 9 Probit Model for Accounting Conservatism, Cash Dividend Overpayment, and Ownership Structure (continued) VariablesExpsign OverPay OverYield Age?-0.024** -0.037*** (-2.45)(-2.51)(-4.24)(-4.26) Size+0.450***0.449***0.488*** (12.94)(12.87)(12.61)(12.66) Predividend+1.272*** 0.540*** (11.37)(11.30)(15.32)(15.34) Stockdiv?-0.153-0.152-0.046 (-1.45) (-0.49) Indscontrol Obs.4458 Pseudo R20.2943 0.35390.3540

30. Table 10 Other Conservatism Measures Variables CscoreM/B PayoutYieldOverPayOverYieldPayoutYieldOverPayOverYield Conserv4.34018.42812.2186.701-0.018***-0.071***-0.033*-0.122*** (1.58)(1.09)(0.77)(0.49)(-3.65)(-2.75)(-1.76)(-2.76) State0.097***0.0980.1860.0840.056***0.178***0.197**0.054 (3.43)(0.99)(1.07)(0.55)(2.76)(3.15)(2.20)(0.38) State Conserv-0.6390.184-0.0660.752-0.002-0.021-0.0040.037 (-1.05)(0.07)(-0.03)(0.45)(-0.38)(-1.40)(-0.18)(1.00) Lev-1.532***-5.536***-4.112-3.230-0.804***-2.060***-1.872***-1.779*** (-3.78)(-7.37)(-1.50)(-1.47)(-21.53)(-8.56)(-11.94)(-9.53) V0.062*0.2940.1000.0250.078**0.373***0.1290.093 (1.72)(0.66)(0.47)(0.14)(2.26)(4.52)(0.62)(0.54) CV0.045*0.141*0.0820.1180.045*0.160**0.0930.159 (1.89)(1.93)(0.89)(0.95)(1.88)(2.18)(0.94)(1.21) CF0.430***2.155***1.490***2.007***0.394***2.029***1.415***1.938*** (5.10)(20.15)(4.84)(13.68)(3.58)(6.26)(4.85)(18.63) ROE0.013***0.048***0.028***0.030***0.016***0.060***0.033***0.041*** (26.29)(27.53)(7.07)(6.08)(36.58)(40.29)(6.59)(5.03) Manown0.191***0.440***0.349*0.0800.186***0.410***0.333*0.036 (5.01)(3.60)(1.76)(0.32)(5.07)(3.48)(1.68)(0.14)

31. Table 10 Other Conservatism Measures (continued) Variables CscoreM/B PayoutYieldOverPayOverYieldPayoutYieldOverPayOverYield Age-0.021***-0.002-0.029**-0.040***-0.023***-0.011**-0.033**-0.051*** (-12.90)(-0.48)(-2.45)(-4.57)(-13.41)(-2.22)(-2.56)(-5.27) Size0.103***0.336***0.2800.385*0.131***0.497***0.404***0.396*** (2.88)(4.49)(1.16)(1.90)(16.48)(17.14)(9.14)(9.24) Predividend0.550***0.731***1.282***0.544***0.548***0.714***1.280***0.531*** (18.65)(31.39)(11.30)(15.56)(30.61)(31.90)(11.17)(13.33) Stockdiv0.043***0.170***-0.133-0.0330.041***0.164***-0.135-0.031 (3.86)(4.56)(-1.24)(-0.35)(3.76)(4.49)(-1.28)(-0.33) IndsControl Obs.4458 Pseudo R20.28690.24340.2932 0.29190.24720.29660.3636

32. Table 11 Endogenous Issue VariablesConservDivConservPayoutConservYieldConservCashdiv/Asset Conserv-1.380***-0.516***-1.806***-0.019*** (-7.53)(-4.35)(-4.62)(-3.71) State0.021***-0.0410.020***-0.0030.020***-0.0640.019***-0.001 (3.01)(-1.63)(2.96)(-0.19)(2.85)(-1.14)(2.83)(-0.77) State* Conserv0.124***0.045*0.166**0.002* (3.20)(1.77)(1.95)(1.67) Predividend-0.0510.351-0.0170.3140.0020.611-0.5890.473 (-8.44)***(21.50)***(-1.99)**(22.97)***(0.70)(38.42)***(-3.37)***(37.34)*** Lev0.120-0.1670.143-0.2340.153-0.1570.133-0.010 (7.24)***(-3.77)***(8.60)***(-7.64)***(9.27)***(-1.56)(7.75)***(-7.73)*** V-0.0490.028-0.0560.060-0.0580.292-0.0490.006 (-2.69)***(0.65)(-3.02)***(2.06)**(-3.11)***(3.04)***(-2.64)**(5.13)*** CV0.0320.0270.0500.001 (1.21)(1.52)(0.83)(0.34) CF1.3770.5882.3910.039 (7.88)***(5.22)***(6.39)***(7.79)***

33. Table 11 Endogenous Issue (continued) VariablesConservDivConservPayoutConservYieldConservCashdiv/Asset ROE-0.001 (-8.21)***(-9.16)***(-9.23)***(-9.16)*** Manown-2.09014.177-2.4309.120-2.6668.569-2.3030.323 (-0.94)(2.76)***(-1.08)(2.64)**(-1.19)(0.75)(-1.03)(2.11)** Age-0.001-0.0020.0410.0002 (-0.53)(-1.47)(7.57)***(2.27)** Size0.0050.080-0.0020.042-0.0040.201-0.0020.001 (1.56)(10.34)***(-0.80)(7.99)***(-1.30)(11.15)***(-0.53)(6.46)*** Stockdiv0.123-0.036-0.065-0.0003 (5.80)***(-2.45)**(-1.35)(-0.45) Grow-0.015-0.009-0.013-0.010 (-1.95)**(-1.07)(-1.67)*(-1.77)* Growsq0.006 0.0070.006 (3.29)***(2.93)***(3.28)***(2.99)*** IndsControl 4458 Pseudo R2 0.09180.25420.07850.23220.07750.40760.08010.4352

34. Table 12 Endogenous Issue VariablesConservOverPayConservOverYield Conserv-1.120-1.127 (-6.25)***(-6.54)*** State0.020-0.0060.019-0.014 (2.87)***(-0.23)(2.79)***(-0.56) State Conserv0.0850.082 (2.20)** Predividend-0.0170.4260.0020.169 (-2.04)**(20.64)***(0.59)(24.12)*** Lev0.146-0.2420.156-0.175 (8.76)***(-5.23)***(9.44)***(-3.93)*** V-0.0550.030-0.063-0.027 (-2.96)***(0.69)(-3.39)***(-0.65) CV0.0250.021 (0.95)(0.82) CF1.1851.157 (6.98)***(7.04)*** ROE-0.001 (-9.10)***(-8.97)*** Manown-2.38671210.30222-2.4831.805 (-1.06)(1.97)**(-1.11)(0.36)

35. Table 12 Endogenous Issue (continued) VariablesConservOverPayConservOverYield Age0.0000695-0.001 (0.03)(-0.67) Size-0.00268290.0982627-0.0040.079 (-0.85)(12.28)***(-1.48)(10.02)*** Stockdiv-0.0385179-0.003 (-1.74)*(-0.18) Grow-0.0121517-0.016 (-1.46)(-2.00)** Growsq 0.0067210.007 (3.23)***(3.74)*** IndsControl 4458 Pseudo R20.07840.19500.07700.2165