A Tale of Two Emerging Market Economies: Evidence from Payout Smoothing in China and Taiwan

Purpose - The purpose of this paper is to investigate payout smoothing in two emerging markets, China and Taiwan. We conduct a comparative study of two emerging market economies that have common cultural and historical characteristics but have experienced different government systems and different approach to the market-based system. Design/methodology/approach- We collect firm level data from Standard and Poor’s Compustat Global database, which covers 5,298 public firms in China and Taiwan during the period 1996-2015, and use a variance decomposition methodology to estimate the smoothness of corporate payout in a common empirical framework that includes net income, and debt and investment policies. Findings - Overall, our empirical findings support recently proposed theories of joint determination of corporate payout behavior with debt and investment policies. We find that debt and investment policies absorb the majority of shocks to net income, and that debt policy is the main shock absorber. Furthermore, we show that firms in China follow a similar strategy with their counterparts in United States and smooth their payout. In contrast to firms in China and US, the payout of the Taiwanese firms is relatively highly sensitive to net income shocks. Originality/value To the best of our knowledge, this study is the first to use a joint model to empirically investigate the extent to which debt and investment poli- cies are used to keep corporate payout smooth in emerging markets.