This study investigates the informational effect of stock liquidity on dividend payouts. Using a sample of Chinese listed firms during 2000–2014, we find a positive relation between stock liquidity and dividend payouts. This result is robust to the use of alternative measures of liquidity, and holds after we control for endogeneity concerns. In accord with our hypothesis that stock liquidity provides information and increases insiders' incentive to pay out dividends, we find that the positive relation between stock liquidity and dividend payouts is more pronounced when the information environment is opaque, and when conflict between controlling shareholders and minority investors is severe. Further, market reactions to regulatory stipulations requiring dividend payouts are more favorable for firms with low stock liquidity, suggesting that legal provisions and regulations are substitutes for stock liquidity. Finally, we rule out several alternative explanations concerning the governance of non-controlling blockholders and the alleviation of manager-shareholder agency conflict.

We develop and test an ownership structure pecking order. Our ownership pecking order sorts out which structures are likely to have relatively fewer agency costs versus higher agency costs. At the top of the pecking order are firms with a single controlling shareholder, they have the lowest agency costs when that shareholder is not the government. Next is the presence of multiple large shareholders. They are even more effective when the large shareholders are of the same type. The structure with the highest agency costs consists of a single large non-controlling shareholder. Our empirical tests confirm this pecking order.