Stock Exchange Regulatory Inquiries And Cash Dividend Smoothing

In recent years,the regulatory model of China’s exchanges has been gradually optimized.Unlike the punitive regulatory approach,non-punitive regulation in the form of inquiry letters requires companies to submit their reply materials on time and does not impose substantial penalties on companies.It remains to be seen how companies issued with question letters can respond to the current stressful situation and adjust their financial decisions.Paying dividends,as one of the important aspects of corporate financial decisions,is an important form of investment income for investors.In addition to mandatory policy regulation that can play a regulatory role on corporate dividend distribution,it is also a thought-provoking topic whether the restraining effect generated by non-punitive regulation will affect the formulation of cash dividend policy of listed companies.Therefore,this paper examines the impact of financial reporting inquiry letters on cash dividend decisions of recipient companies from the perspective of cash dividend smoothing.This paper explores the impact of exchange regulatory inquiries on cash dividend smoothing based on the "substitution effect" and "outcome effect",using A-share listed companies in Shanghai and Shenzhen from 2015 to 2021 as the research sample.The results of the empirical tests show that:(1)The financial report inquiry letter helps to improve the cash dividend smoothing of enterprises,and the stronger the financial report inquiry regulation,the higher the cash dividend smoothing of the receiving enterprises,which supports the "outcome effect".The above findings hold after adopting the Heckman two-stage approach,PSM approach,substitution model estimation approach,test based on annual report inquiry letters,and test based on different measures of cash dividend stability indicators.(2)The results of the mechanism of action test show that the improvement of cash dividend smoothing by the financial report inquiry letter is the result of the combined effect of increased information transparency,reduced tunneling by major shareholders,and increased financing constraints.(3)In further analysis,it is found that financial report inquiry letters related to cash dividends have a stronger effect on enhancing dividend smoothing.The heterogeneity test found that the impact of exchange regulatory inquiries on cash dividend smoothing of listed companies is limited by the development stage of the companies,and the cash dividend smoothing of companies receiving the letters in the mature stage is higher;the promotion effect of financial reporting inquiry letters on cash dividend smoothing is more significant among companies with lower quality of internal control,and exchange regulatory inquiries can compensate for the lack of internal control quality of companies to a certain extent.The degree of competition in the product market strengthens the positive relationship between financial reporting inquiries and cash dividend smoothing,and the synergistic effect between exchange-regulated inquiries and product market competition is good in the external regulation of companies;institutional investors weaken the effect of financial reporting inquiries on cash dividend smoothing,and the relationship between exchange-regulated inquiries and institutional investors’ shareholdings in corporate governance is a mutual substitution..The contribution of this paper is that(1)Most of the current research on cash dividend distribution focuses on the propensity to pay dividends and the level of payout,and there is not enough research on dividend smoothing.The existing literature on regulation and dividend smoothing focuses on dividend regulation policies.Exploring the impact of non-punitive regulation on cash dividend smoothing can help improve the research system in the field of dividend distribution.This paper examines the antecedents of dividend smoothing from the perspective of non-punitive regulation,and finds that the improvement of corporate cash dividend smoothing is the result of exchange regulatory inquiries,which verifies the applicability of the "outcome effect" to cash dividend distribution in China.(2)Based on the negative impact of exchange-regulated inquiries on recipient companies,this paper further explores how companies adjust their financial decisions to cope with the negative impact of the pressure of inquiries,thus expanding the research on the impact of the interactive inquiry system on micro-company behavior.Based on the perspective of cash dividend policy choice,we analyze whether dividend smoothing is improved for firms issued with financial reporting inquiry letters,which is a useful supplement to the economic consequences associated with regulatory inquiries.(3)This paper finds that the improvement of corporate information environment,the convergence of large shareholders’ short-tunneling behavior,and the intensification of corporate financing constraints brought about by the financial inquiry letters can encourage companies to set a smoother dividend policy,which proves that the innovation of the financial regulatory system has a positive effect on the adjustment of corporate dividend policy and provides insights for the regulators to further improve the inquiry letter system.