Cash Dividends, Free Cash Flow and Earnings Persistence——An Empirical Analysis Based on Governance Theory of Long-term Debt

Abstract

Abstract:

With earnings persistence measures as explaining variables and employing quarterly earnings data of nonbank listed companies from Shenzhen and Shanghai stock exchanges over the period 2004-2016, this paper first gives out many time series earnings persistence measures and then conducts an OLS regressional analysis on cash dividend and free cash flow with earnings persistence measures. Evidence shows that cash dividend has a significant positive relationship with proxies for earnings persistence while free cash flow has a significant negative relationship with proxies for earnings persistence. Further investigations show that long-term debt has a significant governance effect and has a substitutional effect with that of cash dividend. Compared with higher long-term debt companies, cash dividends for companies with lower ratios of long-term debt are more positively related earnings persistence and have more retraining effect on free cash flows. Finally, this paper suggests that China should take different mandatory cash dividends rules with different ratios of long-term debt.

Key words: cash dividends, free cash flows, long-term debt governance, earnings persistence

Zhang Jingqi. Cash Dividends, Free Cash Flow and Earnings Persistence——An Empirical Analysis Based on Governance Theory of Long-term Debt[J]. , 2019, 31(3): 227-240.

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