Corporate Innovation and Dividend Payout Policy : Evidence From China’s Listed Companies

Using the sample of China’s listed companies, this study investigates the effect of corporate innovation on dividend payout policy. We expect that managers from more-innovative firms would have more confidence in future corporate performance, and hence, be more motivated to signal future profitability in stock market through distributing cash dividends. Employing the number of effective patents to measure corporate innovation, we find that the propensity to pay cash dividends is higher among more-innovative firms. Moreover, more-innovative firms usually pay more cash dividends to their shareholders than that of less-innovative firms. The empirical results are robust to different model specifications and to various subsamples based on firm size. This study emphasizes the importance of stimulating corporate innovation in both domestic economic growth and shareholder protection. This study sheds light on the role of corporate innovation in major corporate decisions in China, which is the largest emerging economy in the world. Moreover, the empirical findings of this study also have a policy implication to Chinese regulatory bodies who have been urging firms listed in domestic stock exchanges to pay cash dividends. Regulatory bodies may spend more effort on encouraging innovation, as corporate innovation motivates the managers of listed firms to distribute profits to shareholders.