They believe that when investors are not capable of telling the actual value of stocks, they can only make their judgment according to the stock price of those listed companies, which means that investors might have a false evaluation about the actual price of stocks. Therefore, listed companies intend to increase their market value through stock distribution which requires basically no cost. This paper used logit regression to run test on this hypothesis, and the research result is in favor of “price delusion hypothesis”.
Xu Shizhi and Zhang Qi (2007) studied the data between 1997 and 2004 of all listed companies which have distributed their dividend in Shanghai Stock Exchange. Through event analysis approach and cumulative return rate model, Xu and Zhang examined the signaling function of Chinese listed companies’ dividend policies, based on which they analyzed what information has been conveyed by Chinese listed company’s dividend policy. According to their research, the dividend policy of Chinese listed companies boasts of significant signaling function, and the market can be informed of companies’ profitability especially the information about spot return through the announcement of dividend change. In addition, cash dividend, stock distribution and capitalizing of common reserves will convey different information to the market. Cash dividend is in direct correlation with spot return, while stock distribution and capitalizing of common reserves are in negative correlation with spot return. In addition, stock distribution and capitalizing of are interchangeable.
Liu Haiyuan (2010) studied the data of all listed companies after stock division reform in Shanghai Stock exchange during 2006 and 2008. Liu conducted empirical research on different influences of Chinese listed company’s dividend policies on stock price and the influences of different levels of payment of cash dividend on stock price through event study and cumulative return rate model. According to Liu’s research, different dividend policies will result in different reactions from the market, among which stock dividend, mix dividend and cash dividend with high payment level are welcomed by the investors. While both investors and the market do not like cash dividend with low payment level.