Professor Zhou Mingshan, Vice President of Zhongnan University of Economics and Law and Professor of the School of Finance (corresponding author), has co-authored the paper Government debt, government ownership, and corporate cash dividends, which has been officially published in the Journal of Corporate Finance (JCF), a top journal in the field of corporate finance.This journal is recognized as a Class A journal by Zhongnan University of Economics and Law.

Abstract

This paper investigates the joint effect of government debt and government ownership on corporate dividends, using data on local government debt and A-share listed companies in China. We find that excessive local government debt leads to higher cash dividends among local state-owned enterprises (SOEs), indicating that under significant debt pressure, local governments rely on SOE cash dividends to address pressing fiscal challenges. The effect is more pronounced in regions where local governments have stronger control over SOEs and local debt ratios exceed the 100% risk warning threshold. Moreover, heavily indebted local governments prioritize alleviating urgent debt burdens to meet the central government's debt risk mitigation requirements and lower financing costs. We further show that SOEs accommodate these demands by cutting R&D expenditures and operating expenses while increasing bank debt. In fact, government debt is largely converted into SOE bank loans. Finally, we find that high SOE cash dividends enable local governments to scale back bond issuance for refinancing maturing implicit government debt and narrow the interest spread of newly issued government debt. Our findings have important implications for jurisdictions globally where the rule of law fails to protect minority shareholders against expropriation and dividend tunnelling.

Keywords：Government debt; Government ownership; Cash dividends; Debt repayment pressure

Content Brief

Using data on China's local government debt and A-share listed companies from 2015 to 2023, this paper systematically studies the joint impact of local government debt pressure and state-owned equity on corporate cash dividend policies. The study finds that when local governments face significant debt repayment pressure, they will significantly promote local state-owned enterprises (SOEs) to increase their cash dividend levels. Specifically, when the ratio of local debt to GDP increases by one standard deviation, the average cash dividend of local SOEs rises by approximately 14.6%.This effect is more pronounced in enterprises with a high concentration of government ownership, indicating that local governments influence corporate dividends through their controlling position to alleviate fiscal pressure. The study further reveals three motivations for local governments to promote high dividends in SOEs: first, to meet the central government's assessment requirements on local debt risks; second, to reduce government financing costs and mitigate debt credit risks; third, to reduce media attention and exposure on local debt issues. These motivations jointly drive local governments to use SOE dividends as an important means to alleviate short-term fiscal pressure.In the mechanism analysis, the paper finds that to meet the government's high dividend requirements, SOEs often raise funds by cutting R&D expenditures, compressing operating costs, and increasing bank loans. Although this improves the dividend level in the short term, it may also damage the long-term development capacity of enterprises. Notably, although local government debt has decreased in regions with high dividends, the bank debt of SOEs has increased significantly, and the overall generalized government debt (including government bonds, local financing platform bonds, and SOE bank loans) has not decreased, indicating that the debt pressure has essentially been transferred to SOEs.Finally, the paper also finds that SOE dividends do help local governments reduce debt pressure, which is reflected in the decrease in the scale of new government bonds issued to replace local financing platform debt, and the narrowing of the issuance spreads of government bonds and local financing platform bonds.The contributions of this study are mainly reflected in two aspects: first, it is the first time to integrate government debt and government ownership into a unified analytical framework to explore their joint impact on corporate cash dividends, expanding the perspective of research on government debt and corporate decision-making; second, it reveals the behavioral logic of local governments under short-term fiscal pressure, indicating that SOE dividends are not only corporate operating behaviors but also become a policy tool for local governments to alleviate debt pressure. The study has important implications for understanding the fiscal relationship between local governments and SOEs.

Author Biography

Mingshan ZhouMember of the Standing Committee and Vice President of Zhongnan University of Economics and Law; Member of the Standing Committee and Vice President of Xinjiang University of Finance and Economics (Xinjiang Aid Program); Professor and Doctoral Supervisor at the School of Finance, Zhongnan University of Economics and Law. His research interests include corporate finance, corporate innovation, capital markets, and China’s financial system reform. As the chief expert, he has presided over more than 20 research projects, including major projects of the National Social Science Fund of China, general programs of the National Natural Science Foundation of China, key projects commissioned by the China National Intellectual Property Administration, and key consulting projects of the Advisory Committee for Policy Decision of Hubei Provincial People’s Government. He has published nearly 70 academic papers in leading domestic and international journals such as Economic Research Journal, Management World, Journal of Management Sciences in China, Journal of Financial Markets, Journal of Banking & Finance, and Financial Management. Several of his research reports have been approved and adopted by leading officials at or above the provincial and ministerial levels.