Why do firms pay stock dividends: Is it just a stock split

This paper examines why firms choose to pay stock dividends. Using a sample of listed Chinese firms we find that older, more profitable firms with lower leverage, higher levels of retained earnings, private ownership prior to listing, that invest more in fixed assets and operate in regions with lower shareholder protection are more likely to pay stock dividends. Consistent with stock dividends substituting for stock splits, our evidence indicates that the initiation of a stock dividend is associated with a significant positive market reaction and increased analyst following. These results suggest that firms use stock dividends to attract analysts' attention. In addition, the positive announcement effect for stock dividends increases with the size of the split factor, suggesting that management use stock dividends to keep the firm's stock price within its acceptable trading range.