HONG KONG,
CHINA -�Media OutReach�-�9 September 2019 -�Research shows work forces trying to limit dividends are
most successful in nations with broader collective bargaining and effective
labour law enforcement.

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Existing research shows that
corporate payout policies are greatly influenced by the legal protection of
shareholders and creditors. Yet in the past, less attention has been paid to
labour -- another important claimant to companies' resources.

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Workers, who prefer that companies
hold on to profits rather than make cash payouts, have great potential to limit
rent distribution among shareholders.

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"The primary objective of
labour is to maximize the present value of their expected future wages and
benefits through excess rent extraction," says Prof. Donghui Wu,
Professor of School of Accountancy and Director of Centre for Institutions and
Governance at The Chinese University of Hong Kong (CUHK) Business School. Prof.
Wu has recently been named by Abacus as the second
most prolific author during 1999-2018 period, based on papers on the Chinese
capital market published in Tier 1 journals.

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His study "Having a Finger in the Pie: Labour Power and Corporate
Payout Policy" examines the effect of labour
power on business payout policy. With his fellow authors at the Texas Christian
University, the Hong Kong Baptist University, and the University of Macau, the
study utilises data on labour laws with 41,436 firms in 39 countries from 1989
to 2015.

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"We show shifts in labour laws
governing collective labor relations have a significant impact on corporate
payout decisions," Prof. Wu says. "Basically, legislative changes
that strengthen labour power reduce firms' dividend payments and total payouts."

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Prof. Wu says the payout restriction
effect of labor power is more pronounced in companies with greater labor
intensity and in businesses operating in countries with broader collective
bargaining coverage and more effective law enforcement.

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"These results are consistent
with the idea that the workforces of businesses seek to maximize their income
through collective bargaining. Our findings show that labour power is another
important country?wide institution that shapes corporate payout policy,"
he says.

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The study's data included an
examination of the 2007-08 financial crisis -- regarded as the worst crisis
since the Great Depression of the 1930s -- which hit financial markets worldwide
and led the global economy into a prolonged downturn.

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"The crisis, like a shock,
abruptly lowers the available return on investment opportunities of firms in
affected countries," says Prof. Wu.

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"To the extent that economic
rents decrease sharply during a financial crisis, the constraint on company
payouts imposed by labour power may become particularly severe.

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"We used the crisis to generate
additional evidence. Confirming that economic rents declined during the crisis
period, the evidence enhances our confidence that our results were not
spurious," he says.

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Strong labour power enables unions to take a tough
stand in collective bargaining by making more rigid wage and benefit demands
and imposing greater firing costs that, in turn, increase firms' labour
adjustment fees and decrease operating flexibility.

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The strength of union bargaining power increases
with the proportion of staff covered by collective bargaining.

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When firms facing strong labor unions are subject
to lower operating flexibility, managers may cut dividends and conserve cash to
regain some operating flexibility.

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The study contrasted before-and-after differences
in payouts of firms that saw a change in labour laws in a given year with the
before-and-after differences in payouts of businesses that did not experience
such a change in the same year and industry.

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Labour regulation changes are often triggered by
changes in a nation's government. Changes in political leadership often lead to
legislation, including labour laws, being revamped.

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For example, in France, the newly elected President
Emmanuel Macron's government launched an overhaul of French labor laws in
September of 2017 -- the first of a number of reforms he promised would help
revive the economy.

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Reforms to labour laws also can be linked to
business cycles in a country; stricter labor protection legislation is often
passed or retained in periods of economic contractions, while governments may
ease labour rules that deal with unemployment during a period of low economic
growth.

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A nation's labour laws are also shaped by the type
of political party in power: labor regulations are more protective of workers
when leftist governments are in power, while the political leaning of a
government may also influence a company's policy and regulation decisions.

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Prof. Wu says the study found that, as enforcement
of labour laws rests with governments, labor bargaining power increases with
the extent of law compliance. It means the effect of labour power on profit
distribution is more salient in countries with more effective law enforcement.

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The findings of the study, compiled after the data
was used in a series of complicated statistical calculations, took into account
many variables including a company's cash holdings, profitability, financial
leverage, and a nation's gross domestic product growth and economic and equity
market development.

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"Our findings suggest that strong labour power
alone does not cause a reduction in total payouts," says Prof. Wu. "Rather,
it is the bargaining power in conjunction with rigid employment laws that leads
to reductions in the total payouts.

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"We found that the effect of labour power on
corporate payouts is not a purely mechanical profitability effect. Tightened
operating flexibility and excess rent sharing are two channels through which
labour power affects payouts," he says.

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"We also found that firms operating in more
developed financial markets make greater payouts, and that businesses cut
dividends and total payouts after a change in labour laws that grant more power
to labour, compared with a set of control firms in the same industry at the
same time, but based in nations without labour law changes," he adds.

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Prof. Wu says the study adds to a growing body of
international studies examining the economic impact of country-wide laws or law
changes.

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"We have complemented this literature by
demonstrating that shifts in labor laws governing collective labour relations
have a significant impact on a firm's payout decisions," says Prof. Wu.

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Reference:

In?Mu Haw,
In?Mu
Haw, Bingbing Hu, Donghui Wu and Xu Zhang, Having a Finger in the Pie: Labor
Power and Corporate Payout Policy, Financial
Management, 47, 4, (993-1027), (2018).

About CUHK Business School

CUHK
Business School comprises two schools -- Accountancy and Hotel and
Tourism Management -- and four departments -- Decision Sciences and
Managerial Economics, Finance, Management and Marketing. Established
in Hong Kong in 1963, it is the first business school to offer BBA, MBA and
Executive MBA programmes in the region. Today, the School
offers 8 undergraduate programmes and 20
graduate programmes including MBA, EMBA, Master,
MSc, MPhil and Ph.D.

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In
the Financial Times Global MBA Ranking 2019,
CUHK MBA is ranked 57^th. In FT's 2018 EMBA ranking, CUHK EMBA is ranked 29^th
in the world. CUHK Business School has the largest number of business alumni (36,000+)
among universities/business schools in Hong Kong -- many of whom are key
business leaders. The School currently has about 4,400
undergraduate and postgraduate students and Professor Kalok Chan is the Dean of
CUHK Business School.

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More information is available at www.bschool.cuhk.edu.hk or by connecting with CUHK Business School
on Facebook: www.facebook.com/cuhkbschool and LinkedIn: www.linkedin.com/school/3923680/.