Does an innovative managerial cash dividend policy enhance a firm’s total factor productivity? Open Access

With the continuous expansion of domestic debt and rising labor production costs, the conventional growth model can no longer withstand China’s downward economic pressure. Adapting to society’s evolving needs for sustainable development presents a significant challenge. Today, China highlights the imperative of prioritizing the enhancement of total factor productivity (TFP) and expediting high-quality development as the focal points of socialist modernization efforts. Scholarly research has established two primary consensuses regarding the enhancement of total factor productivity. Firstly, optimizing resource allocation stands out as a crucial avenue for improving total factor productivity (Piao et al., 2023). Whether viewed from a macro or micro perspective, facilitating the transition of resources towards high-efficiency sectors emerges as pivotal. Specifically, enhancing total factor productivity at the enterprise level serves as the cornerstone for fostering the high-quality development of one country’s economy. Secondly, technological innovation within the framework of rational resource allocation can unleash productive potential, bolstering R&D investments, and fostering the creation of novel products or services—a separate route to enhancing total factor productivity (Sterlacchini, 1989).

Resource allocation efficiency is closely related to external capital markets. Management learning theory suggests that management refines its investment decisions from the evaluations of external investors (Edmans et al., 2015). The more efficient stock pricing is, the better management is able to collect external information, respond to market requirements, and reduce resource mismatch, thereby increasing total factor productivity. One reason for mispricing stocks is the high rate of turnover. A stable cash dividend policy reduces the turnover rate and attracts more value-oriented investors (Leary and Michaely, 2011). These investors make stock price changes more rational, which prompts the stock price to reflect the real value of the enterprise, which improves the accuracy of stock pricing. Cash dividend smoothing provides the amount of future dividends and reduces the time investors spend analyzing stocks based on historical information. Thus, the stock price reacts faster to other information, which improves the stock pricing efficiency. As the speed of management’s access to the views and opinions of external actors accelerates, the more accurately it grasps market opportunities, and the efficiency of resource allocation improves, which in turn increases total factor productivity.

One reason for the lack of corporate innovation is that management is subject to the strict scrutiny of major shareholders. For reasons of job security and promotion expectations, management tends to fall into a short-sighted circle, staying away from high-risk, long-cycle innovation activities and tending to fast-moving financial activities (Keum, 2021). From an agency perspective, building a harmonious agency environment, reducing shareholder oversight, and allowing management to return to industrial investment is an important way to increase total factor productivity. A smooth cash dividend policy can fulfill this role. A smooth cash dividend policy serves as a bridge between management and shareholders. By maintaining a small range of annual dividend variations, it can reduce shareholders’ distrust (Knyazeva and Knyazeva, 2014), increase shareholders’ tolerance of management’s mistakes, and provide an environment for management to show its talents as an administrator. Numerous scholars have delved into the ramifications of dividend tax rate reforms (Jacob, 2021), tax allocation strategies (Xu et al., 2020), and digital advancements on total factor productivity (Pan et al., 2022), examining both macro-environmental and micro-enterprise dimensions. However, further literature is warranted to scrutinize what types of dividend policies could enhance total factor productivity from the perspective of dividend distribution.

In western markets, managers typically aim to smooth dividend distributions in response to positive or negative earnings shocks, with stable cash dividends becoming a financial benchmark for enterprises (Larkin et al., 2017). Ever since the concept of cash dividend smoothness was introduced (Lintner, 1956), it has been a focal point in financial research. Graham’s survey of CFOs in the U.S. revealed that maintaining cash dividend smoothing ranks as an important financial decision for enterprises (Graham, 2022). A smooth cash dividend policy can bolster financial flexibility, expedite external financing (Chen et al., 2017). In the face of high financing costs, enterprises seeking external funding can easily access funds through a high and smooth cash dividend policy (DeAngelo and DeAngelo, 2007). Similarly, firms practicing “precautionary savings” can mitigate financing challenges by adopting a low and stable cash dividend policy to retain more internal funds (Bates et al., 2009). Hence, it is anticipated that dividend smoothing can augment total factor productivity as financing costs diminish.

China’s economy has been shifting from an investment-driven model to a more sustainable, innovation-driven one. TFP, which measures the efficiency of all inputs used in production, is crucial for this transition. Firms with high TFP are better equipped to drive economic growth through innovation, higher-quality production processes, and more effective resource utilization. As such, improving TFP is essential for China as it seeks to move up the value chain and reduce its dependence on low-cost manufacturing. Cash dividend smoothing can contribute to higher TFP by providing firms with the stability and resources necessary for long-term investments in innovation, R&D, and productivity-enhancing technologies.

For international countries, boosting TFP is a critical factor in maintaining competitiveness. In mature markets, TFP growth is often a primary driver of economic expansion, especially in sectors where capital accumulation is less impactful. Firms that can sustain higher levels of TFP are typically more efficient, innovative, and resilient to economic downturns. Thus, improving TFP is a key policy goal for many countries, including those in Europe, North America, and Japan. Stable dividend policies support this by freeing up capital for long-term investments and reducing the potential for short-term, profit-maximizing decisions that might undermine productivity growth.

Building upon this premise, this paper utilizes financial data from Chinese A-share listed companies in Shanghai and Shenzhen from 2008 to 2022 to examine the impact of cash dividend smoothing on total factor productivity. The findings suggest that a stable cash dividend policy incentivizes firms to enhance total factor productivity. This conclusion persists even after conducting robustness tests such as altering variable measures, employing difference-in-difference analysis, and conducting propensity score matching. A stable cash dividend policy enhances total factor productivity by stimulating firm innovation and curbing financing constraints. Moreover, the effect of cash dividend smoothing on firms’ total factor productivity is more pronounced among firms with low dividend levels, weak bank competition, and during growth periods.

This paper contributes to three key aspects. Firstly, it introduces a novel perspective on enhancing total factor productivity. Diverging from studies centered on macro-fiscal policies and local government behavior, this research delves into the internal decision-making processes of firms. It demonstrates how firms can address financing constraints, enhance corporate governance, and elevate total factor productivity through the implementation of smooth dividend policies. Secondly, it enhances the body of research on cash dividend smoothness. By aligning with traditional principal-agent theory and classical signaling theory, this paper enriches the academic discourse surrounding the outcomes of dividend smoothing. A smooth cash dividend policy serves as a communication tool, stabilizing investor sentiment, alleviating resource mismatches, and bolstering productivity. These findings furnish a theoretical foundation for the relative departments to refine the dividend landscape and foster corporate development.

The remaining sections are organized as follows: section 2 reviews the relevant literature and formulates the hypotheses; section 3 outlines the research design; section 4 presents the empirical tests and results; section 5 offers further analysis of the mechanisms and heterogeneity; and section 6 concludes the study.

Total factor productivity (TFP) evaluates the collective efficiency of capital and labor inputs in an enterprise’s production process. Enhancing TFP, therefore, requires both financial support and efficient investment (Bai et al., 2025a, b). A stable cash dividend policy can be regarded as a fixed annual cash expenditure for enterprises. For companies with historically high cash dividends, reducing dividend payments toward an optimal level can broaden capital utilization and enable the pursuit of greater investment opportunities. Conversely, for firms with historically low dividend payout ratios, gradually increasing dividend payments toward a target level can serve as a credible market signal, improve the internal and external information environment, and facilitate access to financing. In this sense, lowering capital costs critically depends on the market signals transmitted by enterprises.

Previous research indicates that a stable dividend policy signals financial health and plays an important role in reducing information asymmetry (Gwilym et al., 2000). By lowering investor uncertainty, such policies decrease firms’ cost of capital. Critically, this environment, characterized by reduced risk perception and strengthened managerial commitment, creates stronger incentives and greater capacity for firms to invest in research and development (R&D) and adopt innovative technologies. Since technological innovation is widely recognized as a fundamental driver of productivity gains, dividend smoothing, by fostering innovation-oriented investments, is posited to positively contribute to total factor productivity (TFP). Moreover, a stable cash dividend policy functions as an effective corporate governance mechanism by constraining managerial rent-seeking behavior. The ongoing pressure to sustain dividend payouts compels managers to improve investment efficiency and optimize resource allocation (Brav et al., 2005).

Theoretically, Miller and Modigliani (1961) proposed the Dividend Irrelevance Theory, which suggests that in perfect capital markets (i.e. without taxes, transaction costs, or asymmetric information), a company’s dividend policy has no effect on its value. According to this theory, shareholders can create their own “dividends” by selling shares if they wish to receive cash, rendering the dividend decision irrelevant to the firm’s market value. In contrast, Lintner (1962) and Gordon (1983) introduced the Bird-in-the-Hand theory, which argues that investors prefer the certainty of dividends over the potential for future capital gains. As a result, companies that pay dividends may be valued more highly by investors, leading to higher stock prices. In this view, dividends reduce uncertainty and are perceived as less risky than the prospect of future capital gains.

Inspired by the above theories, this study explores the role of dividend policy and government intervention. Empirically, Wang et al. (2023) analyze panel data from various Chinese provinces and cities, revealing that stringent environmental control policies on carbon emissions significantly elevate China’s green total factor productivity. Environmental policies exert a noteworthy influence on total factor productivity, as evidenced by He et al. (2022). They empirically demonstrate the increasing impact of environmental protection regulations on China’s total factor productivity over time, thereby promoting high-quality development. Double taxation on shareholders’ dividend income, common in many countries, curtails enterprises’ investment activities. Elevated dividend taxes prompt investors to seek higher returns, resulting in excessive capital outflows, underinvestment, and diminished total factor productivity. Reductions in dividend tax rates alleviate the cost of external equity financing, leading to a substantial increase in total factor productivity for enterprises lacking internal funds (Jacob, 2021). Resource misalignment is a significant contributor to total factor productivity decline, with efforts to shield high-efficiency enterprises from being exploited by less productive entities enhancing overall productivity. Xu et al. (2020) suggest that an optimal configuration of certain tax policies in China can effectively balance economic and social benefits, safeguarding enterprises’ production processes while augmenting governmental functions. Similarly, the Chinese government’s intervention influences the allocation of societal resources. Yu et al. (2019) explore the correlation between local governments’ constraints on economic objectives and total factor productivity, revealing that stringent constraints lead to distorted resource allocation and decreased total factor productivity. Government subsidies play a pivotal role in enhancing total factor productivity within industries, albeit with a nuanced impact on recipient firms’ performance. Zhang et al. (2023) highlight the adverse effects of Chinese government intervention, which exacerbates resource mismatches and restricts the growth of well-performing private enterprises due to state-owned enterprises’ preferential access to resources.

In addition, several studies have delved into how modern technology can enhance total factor productivity at the micro-firm level. On the supply side of funds, emerging technologies play a crucial role in improving information identification and transfer efficiency. Financial institutions, including banks, leverage financial technology to accurately discern enterprise information credit requirements, assisting small and medium-sized enterprises (SMEs) in overcoming financing obstacles and enhancing the efficiency of credit fund allocation (Sardana and Singhania, 2018). On the demand side of funds, enterprises harness digital transformation to bolster innovation capabilities, optimize workforce structures, and augment production efficiency (Pan et al., 2022). Internal research and development (R&D) and innovation initiatives can effectively boost total factor productivity in certain low-income countries with limited innovation propensity. However, external improvements in the innovation ecosystem have yielded minimal contributions, possibly due to the competitive nature of technological advancements (Xiao et al., 2022).

In summary, the majority of existing research focuses on mitigating resource misallocation and enhancing R&D investment as pathways to improving total factor productivity. Few studies delve into how dividend policy influences total factor productivity from the vantage point of internal financial decision-making.

Cash dividend smoothing refers to a firm’s deliberate effort to maintain relative stability in annual dividend payments, thereby limiting fluctuations within a narrow range (Lintner, 1956). The economic consequences of this practice are primarily associated with its signaling and governance functions. A stable dividend policy can mitigate concerns about insufficient operating cash flows, stabilize investor expectations, and, over time, help alleviate information asymmetry. From a governance perspective, studies of dividend smoothing emphasize its role in constraining opportunistic behavior by management and controlling shareholders (Leary and Michaely, 2011). Specifically, a predictable dividend policy attracts the scrutiny of external stakeholders, such as institutional investors and financial analysts, whose monitoring creates a supervisory effect that discourages insiders from diverting resources through abnormal dividend practices (Cheng et al., 2021).

Nonetheless, some scholars argue that dividend smoothing may not resolve agency costs or information asymmetry and could, in fact, exacerbate managerial opportunism and strengthen information barriers (Lambrecht and Myers, 2012). These divergent perspectives are often attributable to variations in market environments and ownership structures across countries. In the context of China’s concentrated ownership structures and persistent information frictions, this study contends that a stable dividend policy is more likely to reduce agency costs and mitigate information asymmetry.

Based on signaling and agency theories, much of the existing literature examines the relationship between dividend smoothing and firm value. Larkin et al. (2017) contend that dividend smoothing neither enhances firm value nor increases short-term shareholder wealth. In contrast Brockman et al. (2022), using data from 21 countries, demonstrate that dividend smoothing significantly improves firm value. Their findings suggest that investors prefer portfolios with stable dividend policies and are willing to pay a premium for such stability—a conclusion consistent with Chen et al. (2017). Relative to firms with volatile dividend policies, companies with stable and predictable payouts are rewarded by investors who capitalize future dividends at lower discount rates, thereby reducing financing constraints.

Despite these contributions, research on the consequences of dividend smoothing remains fragmented and, at times, contradictory. This paper argues that these inconsistencies stem from the interaction of different theoretical mechanisms within diverse institutional and market contexts. Factors such as dividend taxation, ownership concentration, the efficiency of information markets, and investor composition all condition the effects of dividend smoothing. In light of these factors, this study examines whether a stable dividend policy enhances firms’ capital access and mitigates agency conflicts, thereby improving total factor productivity. In doing so, it not only provides new empirical evidence relevant to agency and information asymmetry theories but also offers a novel perspective on how emerging capital markets can foster productivity growth through dividend policy design.

Optimizing resource allocation and enhancing innovation capability stand as two pivotal methods for augmenting total factor productivity, intricately linked to the corporate information environment and governance standards (Piao et al., 2023; Sterlacchini, 1989). Theoretically, a consistent cash dividend policy intersects with corporate investment choices and the accessibility of external funds, potentially impacting total factor productivity through financing and governance mechanisms.

Firstly, the financing effect of cash dividend smoothing is examined. One of the reasons for the inefficient allocation of resources is that the internal funds of enterprises cannot meet the reinvestment, and they turn to high-cost external financing, which leads to the reduction of investment efficiency (Wang et al., 2021), or even the inability to obtain funds, resulting in a waste of investment opportunities. Therefore, from the perspective of capital, enterprises need to establish free and low-cost financing channels to improve total factor productivity. The pecking order theory suggests that free and low-cost financing channels should be prioritized by endogenous financing (Myers and Majluf, 1984). However, in reality, shareholders’ dividend requirements and uncertain business factors lead to the fact that most enterprises are unable to realize reinvestment by relying on endogenous financing alone, but rely on a combination of internal and exogenous financing. Therefore, balancing internal and external financing and trying to reduce financing costs becomes a way to increase total factor productivity. A stable cash dividend policy, on the other hand, can fulfill this role. On the one hand, firms paying stable dividend policy can appropriately reduce the dividend payout ratio (Leary and Michaely, 2011) and save endogenous funds for reinvestment. On the other hand, paying stable dividends can also serve to signal the soundness of internal operations, link internal and external information asymmetry, and reduce external financing costs (Chen et al., 2017; Bai et al., 2025a, b). However, different from the explanation made by signaling theory, another part of scholars believe that stable cash dividend policy does not serve to alleviate financing constraints (Larkin et al., 2017). So the explanation of the role of cash dividend smoothness in total factor productivity enhancement from the perspective of financing constraints needs to be empirically tested.

Secondly, the governance effect of cash dividend smoothing is examined. Conflicts between majority shareholders and management, and between minority shareholders and majority shareholders can deteriorate the firm’s governance environment and inhibit innovative activities (Sakaki and Jory, 2019). From the first type of agency perspective, shareholders will rely on a high cash dividend policy to pressure management due to their inability to participate in the firm’s operational decisions. For reasons of job security and promotion expectations, management will fall into a short-sighted circle, pursuing stable and low returns or financial activities with short return cycles and high risks, and avoiding R&D and innovation (Keum, 2021). From the second type of agency perspective, due to the weak regulatory power of minority shareholders, the cash dividend policy has been alienated into a common means for major shareholders to transfer funds and hollow out the firm. The willingness of minority shareholders to regulate has also been further reduced. Innovative activities naturally cannot be carried out after large and unstable dividends lead to excessive capital outflows. Therefore, reducing agency conflicts and creating a favorable governance environment play an important role in promoting R&D and innovation, which in turn enhances total factor productivity.

A stable cash dividend policy can do this. First, a stable cash dividend policy allows management to be accountable to shareholders on an annual basis, which directly reduces oversight by large shareholders. Second, stable cash dividends can attract institutional investors (Allen et al., 2000; Easterbrook, 1984), whose professional advantage also reduces the intensity of large shareholders’ monitoring of management and enhances management’s sense of security. The management-shareholder conflict is eased, and the management’s function of “management scientist” can be realized. At the same time, institutional investors have strong professional ability, information advantage, more systematic judgment of management’s business behavior, more long-term, will give affirmation to the long-term value of the enterprise activities (Sakaki and Jory, 2019). Third, stable cash dividends directly circumvent the chaos of unusually high cash payouts or no cash dividends, and alleviate the small and medium-sized investors’ free-rider mentality. Small and medium-sized investors are increasingly aware of self-protection, voting with their feet behavior is gradually reduced, and the enthusiasm to participate in corporate governance is gradually improved, providing another layer of protection for corporate funds used for R&D and innovation instead of being tunneled out by major shareholders.

However, another stream of research studies the consequences of cash dividend smoothing from the perspective of governance believe that cash dividend smoothing is an umbrella for management’s rent-seeking (Fudenberg and Tirole, 1995; Lambrecht and Myers, 2012). According to this group of scholars, it can be predicted that cash dividend smoothing in the long run will hurt shareholders’ equity and firm value, deteriorate the governance environment and inhibit innovative activities.

Therefore, given the opposite theoretical predictions for both the financing constraint channel and the innovation channel, this paper proposes the following alternative hypothesis:

The logical framework of the theoretical analysis is shown in Figure 1.

Furthermore, this study focuses on the relationship between corporate governance and firms’ total factor productivity (TFP). The core argument is that a smooth cash dividend policy enhances management’s confidence in improving TFP by providing the necessary financial strength. However, conflicts between majority shareholders and management often lead to short-sighted behavior, with investments in financial products or inefficient projects damaging TFP—reflecting management’s reluctance to prioritize long-term productivity. Therefore, freeing management from excessive oversight is crucial for improving TFP, and a stable dividend policy plays a key role in this. Large shareholders often use dividends as a tool for monitoring management, and stable dividends can meet shareholders’ income expectations, reducing mistrust of management. On the other hand, management may struggle to raise TFP due to the need for long-term investments, which often require diverting funds from dividends. In line with the tunnel-excavation hypothesis, excessive dividend payouts to major shareholders can deplete the funds available for investment, leaving management unable to focus on improving TFP. A stable dividend policy, by allowing for smaller but more consistent dividend payments, ensures that funds are available for investment while fostering confidence among smaller shareholders. This increased confidence enables them to engage more actively in corporate governance, creating a more supportive environment for management to undertake riskier but potentially rewarding initiatives like innovation. In summary, cash dividend smoothing contributes to higher TFP by both bolstering management’s confidence and providing the capital necessary for growth.

In 2008, the China Securities Regulatory Commission delivered the semi-mandatory dividend policy. It is the first policy to require listed companies to specify in their articles of association that cash dividends should be stable. The policy succeeded in linking the eligibility for equity refinancing to the cash dividend payout rate, which had a significant impact on corporate dividends. Therefore, this paper takes all the listed companies in Shanghai and Shenzhen from 2008 to 2022 as samples. Considering that other measures of cash dividend smoothness are used in the robustness test, we also use data from 2006 and 2007. In addition, this paper carries out the following screening: (1) excluding the samples with negative or greater than two cash dividend smoothness; (2) excluding the insolvent samples; (3) excluding the enterprises with S.T. during the sample period; (4) excluding the enterprises in the financial industry; and (5) excluding the samples with missing control variables. Finally, the paper obtains 16,886 annual firm samples. This paper shrinks the data for all continuous variables at the 1 and 99% quantiles and Clusters the heteroscedasticity-robust standard errors for all regressions at the firm level. All empirical results in this paper are obtained using the OLS method. The financial data for this study are obtained from the CSMAR and WIND databases.

This paper employs regression model (1) to examine the impact of cash dividend smoothness on total factor productivity.

Firstly, TFP refers to the total factor productivity of enterprises. In empirical research, the main approaches to estimating TFP include the least squares method, fixed effects method, generalized method of moments, OP method, and the Levinsohn-Petrin (LP) method. At the firm level, TFP estimation is complicated by simultaneity bias and the bidirectional causality between input factors and productivity. Consequently, the least squares and fixed effects methods suffer from severe endogeneity issues. Although GMM mitigates such endogeneity concerns, it requires extensive time-series data, which is often unavailable. For this reason, most empirical studies favor the OP and LP methods. Olley and Ariel (1992) propose an approach that estimates firm-level TFP in logarithmic form. Their method assumes that labor input is variable and determined contemporaneously (period t), while capital input is predetermined (period t–1). Firms’ investment decisions, based on current productivity, serve as proxies for unobservable shocks, thereby addressing simultaneity. In this paper, when applying the OP method, capital input is measured by net fixed assets, where capital expenditure is defined as cash payments for the acquisition of fixed assets, intangible assets, and other long-term assets, net of receipts from disposals. Labor input is represented by the logarithm of the number of employees in listed firms, and output is proxied by operating revenue. Beyond employing the OP method for the baseline regression, we also re-estimate TFP using the LP method as part of the robustness analysis, with identical measurement procedures for all variables.

Secondly, the speed of adjustment (SOA) of cash dividends captures the extent to which firms adjust dividend payments toward a target level. The earliest measurement framework, Lintner’s model, has been widely used. However, subsequent studies have noted that it is biased in assessing dividend smoothness and fails to adequately capture cross-sectional heterogeneity in dividend policies (Leary and Michaely, 2011). Furthermore, corporate managers themselves have highlighted inconsistencies between actual dividend targets and outcomes implied by Lintner’s model (Brav et al., 2005). To address these limitations, two alternative methods have been adopted in the literature. The first method, introduced by Leary and Michaely (2011), calculates SOA through a partial adjustment model. Specifically, the target dividend payout ratio is defined as the median payout ratio over the previous five years. The deviation (Dev) is then computed as the target payout ratio multiplied by earnings per share minus the lagged dividend level. Regressing the change in dividends on Dev yields a coefficient that represents the SOA. The second method is a model-free, nonparametric measure proposed by Li et al. (2025), which defines SOA as the ratio of the standard deviation of dividends per share (over the prior three years) to the standard deviation of earnings per share (over the same period). In this paper, we use the first method in the primary regression analysis and employ the second method in the robustness test using a difference-in-difference framework. However, the five-year window required for the first method poses challenges. Since our sample begins in 2008 and the relevant policy change occurred in 2013, only the 2008 SOA estimates remain unaffected by the policy, thus making the method unsuitable for difference-in-differences analysis. By contrast, the second method, which relies on a three-year period, ensures that a substantially larger portion of the sample remains unaffected by the 2013 policy. Therefore, we adopt the second method for the difference-in-differences analysis and further use it to adjust explanatory variables in robustness checks.

Finally, CONTROL consists of a set of firm-level control variables. Following the influential studies in this area by Leary and Michaely (2011) and Jacob (2021), this paper includes the following control variables: firm size (Size), debt ratio (Lev), profitability (Ebitda), listing age (Listage), board size (Board), dual positions (Dual), proportion of independent directors (Indep), equity concentration (Top1), growth (Growth), liquidity ratio (Liquid), executive compensation (Tmtpay), and ownership structure (Soe). In addition, the analysis accounts for both time and industry fixed effects. The definitions of these variables are provided in Table 1 below.

From the results of descriptive statistics presented in Table 2, it is evident that the mean value of TFP_OP is 8, with a standard deviation of 0.930. This indicates notable variations in the level of total factor productivity among the listed companies in China. The median value of SOA is 0.82, with a minimum value of 0.05 and a maximum value of 1.760. These values suggest that the overall volatility of cash dividends in China’s capital market is high, with significant disparities in cash dividend smoothing among enterprises.

Table 3 demonstrates the matrix of correlation coefficients. The correlation coefficient between cash dividend smoothing and total factor productivity is −0.075 and is significant at the 1% level. This is a preliminary indication that there is a positive correlation between cash dividend smoothing and total factor productivity. A smooth cash dividend policy can increase total factor productivity.

Columns (1)–(2) of Table 4 present the impact of cash dividend smoothing on total factor productivity. The regression outcomes indicate a significant enhancement in total factor productivity due to a smooth cash dividend policy, even after controlling for industry and time-fixed effects. To mitigate endogeneity concerns, column (3) regresses the firms’ next-period TFP instead of the explanatory variables in the model. Despite this adjustment, the coefficient of SOA remains significantly negative at the 1% level. These consistent findings across all regressions suggest that cash dividend smoothness positively influences total factor productivity.

To ensure accurate measurement of total factor productivity, this paper employs the LP method to re-calculate TFP and incorporates it into the regression of model (1). The results are displayed in column (1) of Table 5, wherein the SOA regression coefficient confirms the robustness of the previous conclusion. Additionally, two replacements of explanatory variables are conducted. Firstly, the average value of the dividend payout ratio over the last five years replaces the median value as the target dividend payout ratio to measure SOA1. The regression outcomes are presented in column (2) of Table 5. Secondly, cash dividend smoothing is re-measured using the free parametric modeling approach, which involves dividing the standard deviation of pre-tax cash dividends per share over the last three years by the standard deviation of earnings per share over the same period. The regression results in the respective columns of Table 5 support the conclusion that cash dividend smoothing enhances firms’ total factor productivity.

On the one hand, due to the concern of sample self-selection problem, this paper takes all control variables as covariates and uses the nearest neighbor matching method to select matching samples. On the other hand, in 2013, the CSRC issued the “Supervisory Guidelines for Listed Companies No. 3 - Cash Dividends for Listed Companies,” which offers differentiated guidelines on dividend levels for listed companies and underscores the importance of maintaining reasonable and stable corporate dividend policies. Following Liu and Ren (2023) s’ approach, we use the matched sample to conduct difference-in-difference experiment. The specific model is outlined as follows:

Post is a dummy variable that takes the value 1 in 2013 and later periods, and 0 otherwise. Suppose the difference between the mean value of SOA for firms’ cash dividend smoothing after 2013 and before 2013 is less than the median (negative) of the sample change amount. In that case, the firm is considered more affected by the cash dividend policy in 2013, categorized as the experimental group, with Treat set to 1. Conversely, if the effect is less, the firm is categorized as the control group, with Treat set to 0.

After matching, the ATT value is 3.83 (larger than 1.64), which indicates the matched sample is effective. PSM balance test in Table 6 shows that before matching, most variables were significantly different between the treatment and control groups. However, after matching, there was no significant difference between the treatment and control groups for all variables except for Soe, indicating that the matching variables pass the balance test.

Table 7 exhibits the results of the parallel trend test in the matched sample. To avoid the pitfalls of setting dummy variables, we exclude the dummy variable for 2012 (pre_1). The coefficients on the interaction terms are not expected to be significant before the policy was implemented, i.e. the dependent variables for the treatment and control groups are not expected to be significantly different between the years before the policy was implemented. The data show that none of the correlation coefficients were significant before the policy was implemented in 2013, whereas the coefficient started to be significant in the second year after the policy was implemented (2015) and this coefficient remained significant in subsequent years. And the coefficient is significantly positive, indicating that the cash dividend smoothing policy in 2013 increased total factor productivity. This indicates that the DID model set up in this paper passes the parallel trend test.

Then we conduct the difference-in-difference test in the matched samples. Column (1)–(2) in Table 8 show that the regression coefficients for Treat $×$ Post are significantly positive at the 1% level, indicating that the new cash dividend policy implemented in 2013 enhances dividend stability and improves the enterprise’s total factor productivity, thereby supporting the core conclusion of this paper.

The empirical findings presented above indicate that maintaining a stable cash dividend policy enhances firms’ total factor productivity TFP, a conclusion further validated through robustness tests. However, the underlying mechanism through which cash dividend smoothing improves total factor productivity remains unclear. As discussed earlier, a stable dividend policy may influence TFP in opposing directions through financing and governance channels. To investigate the mediating role of financing constraints and innovation, we designed a three-step test. Specifically, we regress financing constraint and innovation variables separately into model (1) to examine the significance and variation in the coefficients of the two variables and SOA. Following prior research, we use KZ index as a proxy for financing constraints and the number of Patents (Pan et al., 2022) as a proxy for innovation. A higher KZ index indicates more severe financing constraints faced by the enterprise. Our empirical evidence suggests that dividend smoothing enhances TFP primarily by improving the information environment and strengthening corporate governance. These findings are consistent with classical signaling theory and traditional principal–agent theory.

From the perspective of financing effects, it is essential to empirically test whether cash dividend smoothing mitigates firms’ financial constraints, given the inherent difficulty of directly observing the accuracy of internal information conveyed by dividend policies. Building on the preceding hypothesis, dividend smoothing is expected to enhance total factor productivity (TFP) by easing financing constraints. If this mechanism holds, the regression of financing constraints on SOA should yield a positive coefficient, while the regression of TFP on both financing constraints and SOA should produce negative coefficients.

The regression results reported in Columns (2)–(3) of Table 9 are consistent with these predictions. In Column (3), the absolute value of the SOA coefficient decreases (0.089 < 0.093), accompanied by a reduction in its statistical significance. This pattern suggests that the alleviation of financing constraints operates as a channel through which stable cash dividend policies improve firms’ total factor productivity.

The paper posits that this finding supports the classical signaling theory, suggesting that dividend smoothing reduces the cost of financing. This is particularly relevant in those immature capital markets, characterized by anomalies such as “iron chickens” and excess cash. The high level of long-term dividend volatility leads institutional investors to assign a premium to firms with stable dividends, thereby easing refinancing difficulties. In the emerging or immature markets, the stability of cash dividend policy primarily serves as a mechanism for transmitting accurate and favorable information.

Based on the governance effect, the extent to which a smooth cash dividend policy can positively influence corporate governance hinges on the information dynamics between management and shareholders. R&D innovation serves as a crucial indicator of internal corporate governance effectiveness, vital for enhancing total factor productivity. In this paper, new and design patents are excluded as they may not significantly contribute to productivity. Instead, invention (Patent) are utilized to measure firms’ innovations. Following the analysis of the previous hypothesis, cash dividend smoothing can contribute to total factor productivity by increasing innovation patents. If this mechanism is valid, the inhibitory effect of cash dividend unsmoothing on total factor productivity should be weakened as the level of innovation increases. Accordingly, in the regression of total factor productivity on Patent and SOA, the coefficient for Patent is expected to be positive, while that for SOA is expected to be negative. Similarly, in the regression of innovation on SOA, the coefficient for Patent is expected to be negative. The regression results reported in Columns (5)–(6) of Table 9 are consistent with these expectations. Moreover, the absolute value of the SOA coefficients decreases relative to Column (1), indicating that a stable cash dividend policy can enhance firms’ innovation capabilities, thereby promoting total factor productivity.

This finding aligns with the predictions of traditional principal-agent theory regarding the consequences of cash dividend smoothness. A stable cash dividend policy alleviates shareholder monitoring pressure on executives, curtails rent-seeking behavior, and enhances corporate governance standards.

The preceding analysis has established that dividend smoothing significantly enhances firms’ total factor productivity. However, it remains essential to identify the factors influencing the relationship between the two. Through cross-sectional factor analysis, this paper delves into the heterogeneity results concerning the impact of cash dividend smoothing on total factor productivity improvement. This analysis enriches research on life cycle theory and market competition.

Firstly, much of the literature examining the impact of dividend policy on firms primarily focuses on the level of dividend payment and the willingness to pay dividends, paying less attention to cash dividend smoothness (Javakhadze et al., 2014). Smoothness is typically measured based on the cash dividend payout ratio, with the target dividend payout ratio and profitability jointly determining the degree of cash dividend smoothness. While both dividend smoothness and dividend payout ratio originate from information asymmetry and agency theory, the latter is more adept at swiftly conveying rich signals and performing a more robust governance function.

In reality, the China Securities Regulatory Commission (CSRC) has implemented several policies to enhance the market environment, transitioning from soft constraints to substantial restrictions on the regulation of corporate dividends. These policies have established quantitative boundaries for dividend payout ratios and imposed differentiated requirements. However, the regulation of smoothness remains at an early stage of initiative and guidance and warrants sufficient attention. Therefore, it is crucial to consider the economic implications of cash dividend smoothing alongside the cash dividend payout level.

Firms with low dividend levels often experience limited profitability and face challenges in accessing finance. While high dividend yields can emit positive signals, maintaining a smooth dividend policy can also signal low business risk for firms with low dividend payout ratios and compensate for these shortcomings (Gwilym et al., 2000). Consequently, we anticipate that the total factor productivity-enhancing effect of cash dividend smoothing will be more pronounced among firms with insufficient dividends.

In this paper, we divide the sample into high and low dividend payout ratio groups using the median cash dividend payout ratio as the threshold. Subsequently, we regress them separately using model (1). The results, presented in columns (1)–(2) of Table 10, indicate significantly negative regression coefficients of SOA in the low dividend payout ratio group and insignificant coefficients in the high dividend payout ratio sample. This suggests that cash dividend smoothing can complement the signal of dividend payout and enhance total factor productivity, confirming our earlier prediction.

Secondly, according to the life cycle theory, start-up firms possess abundant investment opportunities and maintain a simple organizational structure. Moreover, the impact of technological advantages on enhancing productivity is prominent. Conversely, mature firms tend to have larger scales and more complex structures, with the process of reforming production methods incurring higher costs. Mature-stage enterprises typically boast solid sales channels and high operating incomes, while growth-stage enterprises often struggle with improving their core competitiveness due to low market share and limited internal capital accumulation. Consequently, they may find it challenging to afford high dividend payouts. DeAngelo et al. (2006) concluded that the level of dividend payout gradually increases as enterprises transition into the maturity stage.

On one hand, enterprises in the growth stage require financing to expand their production scale. On the other hand, they cannot afford to pay high-level dividends, which could reduce financing costs. Hence, a reasonable dividend policy is crucial for growth-stage enterprises to make investment and financing decisions effectively. This paper contends that a smooth dividend policy serves as a compromise, enabling growing firms to retain internal funds while also emitting low financial risk signals to attract external financing. To measure firms’ growth, this paper employs the retained earnings ratio to owner’s equity (RT); the smaller the value, the more likely the firm is in the growth period. The regression results in columns (3)–(4) of Table 10 indicate that a smooth cash dividend policy has a more pronounced effect on firms’ total factor productivity during the growth period.

Thirdly, the degree of bank competition can represent the level of financial development and outside governance of a region. From the perspective of financing costs, the more competitive banks are in a city, the greater the credit capacity of enterprises (Jiang et al., 2023). This is because banks, in order to proliferate their business and maintain profitable growth, will lower their lending rates or lower their application thresholds for lending enterprises, actively lowering corporate financing constraints. From a corporate governance perspective, firms in regions with intense bank competition also have higher levels of corporate governance (Chemmanur et al., 2020). This is because bank competition raises banks’ risk awareness, driving them to increase their supervision of lending firms both before and after lending, creating an external deterrent. There is a substitution between this and the financing and governance efficacy of cash dividend smoothing. Therefore, the effect of cash dividend smoothing on firms’ total factor productivity can be expected to be more pronounced in regions where bank competition is weaker. In this paper, the HHI index is employed to gauge the bank competition. Based on the annual sample median, firms are categorized into groups with strong and weak bank competition. The regression coefficients of SOA are compared to discern the heterogeneous effects of bank competition on the relationship between cash dividend smoothing and total factor productivity improvement. The regression results in columns (5)–(6) of Table 10 support these predictions and withstand the suest test, suggesting that firms with weak bank competition are more likely to enhance total factor productivity by maintaining a stable dividend policy.

Using data from A-share listed companies in Shanghai and Shenzhen covering the period from 2008 to 2022, this study empirically investigates the impact of cash dividend smoothing on total factor productivity. The findings indicate that, firstly, firms adopting a smooth cash dividend policy experience a significant increase in total factor productivity, a conclusion substantiated through various robustness tests. Secondly, a smooth cash dividend policy enhances total factor productivity by addressing financial constraints and fostering innovation. Lastly, the impact of cash dividend smoothing on total factor productivity is more prominent in firms characterized by low dividend levels, and those in the growth phase and weak bank competition.

The findings presented in this paper not only contribute to the ongoing discourse on cash dividend smoothing within signaling and principal-agent theories but also offer a novel avenue for enhancing total factor productivity. Moreover, these findings offer significant practical implications.

Firstly, in terms of fostering high-quality development, firms facing constrained business activities and limited internal cash reserves can use cash dividend smoothing as a tool to mitigate financial constraints. By conveying positive business outlook information to the market, firms can attract external financing and facilitate investment, ultimately contributing to enhanced total factor productivity.

Secondly, from a corporate governance perspective, optimizing dividend policies can improve the overall governance environment. This strategic approach can empower management to align dividend distributions with business goals, thereby bolstering total factor productivity.

Lastly, from the standpoint of capital market supervision, promoting stable and sustainable dividend payout behavior is paramount. This not only safeguards the rights and interests of small and medium-sized investors but also fosters a long-term investment ethos. Therefore, the relevant regulatory authority should prioritize efforts to encourage listed companies, particularly those with lower dividend distribution levels, to adopt smooth cash dividend policies. This proactive stance can enhance investor confidence, maintain stable expected returns, and contribute to a healthier market environment overall.