China's recent economic adjustments, including monetary, fiscal, and industrial policies, have introduced significant economic policy uncertainty (EPU). While aiming for stable economic growth, these policies inherently involve uncertainty. Existing research demonstrates EPU's macroeconomic implications, such as decreased employment and macroeconomic volatility. At the microeconomic level, studies have explored EPU's impact on corporate equity risk premiums, firm-level investments, investment efficiency, cash holdings, corporate transparency, and M&A activity. Dividend policy, crucial for responsible corporate management and capital market stability, remains an under-researched area in the context of EPU. This study aims to fill this gap by examining the relationship between EPU and cash dividend policies of Chinese listed companies. The paper explores the competing hypotheses arising from the increased internal and external risks faced by firms in the face of EPU, and the potential for reduced growth opportunities and increased investor demand for cash dividends to lead to changes in dividend payout.

Traditional dividend policy theories like the 'bird in hand' theory, 'dividend irrelevance theory,' and 'tax preference theory' have been complemented by modern theories including signaling theory, agency cost theory, behavioral finance theory, and the corporate lifecycle theory. These theories provide different frameworks for understanding dividend payouts and their impact on firm value. However, the influence of macroeconomic factors, especially EPU stemming from frequent government policy changes, on corporate dividend policies, is less explored. Previous research highlights EPU's negative effects on firm investment, financing behavior (financing constraints, costs, and debt levels), and other corporate actions like mergers and acquisitions. This study expands on this literature by specifically focusing on the impact of EPU on dividend policies, enriching our understanding of corporate responses to macroeconomic uncertainty.

The study uses panel data of 4421 A-share companies listed on the Shanghai and Shenzhen stock exchanges from 2007 to 2021. Data is filtered to exclude H-shares, B-shares, financial and insurance companies, companies with abnormal financial conditions (ST or ST-plus), companies in their listing year, and observations with missing data. Continuous variables are winsorized at the 1st and 99th percentiles. The China Economic Policy Uncertainty Monthly Index, constructed by Huang and Luk (2020), is used to measure EPU. Cash dividend data is from CSMAR, and other financial variables are from the Wind database. The primary regression model examines the relationship between cash dividend policy (measured by dividend payout tendency, cash dividend per share, and dividend payout ratio) and EPU, controlling for various firm-level (size, leverage, profitability, age, earnings per share, ownership concentration, board size, proportion of independent directors, CEO duality) and macroeconomic variables (GDP growth rate, M2 growth rate, macroeconomic sentiment index, consumer price index). To address endogeneity concerns, an instrumental variable (IV) regression using US political polarization as an instrument for EPU is employed. Robustness checks include replacing dependent variables (dividend sales ratio, dividend yield) and EPU indicators (using December's EPU, Davis et al.'s (2019) EPU index). Further analyses examine heterogeneity across company size, ownership type, equity concentration, and financing constraints. A two-step regression approach analyzes the mediating mechanisms of investor dividend demand, agency costs, and growth opportunities. Finally, the study investigates the impact of dividend policies on firm value (measured by book-to-market ratio and Tobin's Q) under EPU conditions.

The study finds a significant positive relationship between EPU and cash dividend policies in China. Increased EPU leads to a higher probability of dividend payments and larger dividend payouts. This finding is robust to different model specifications, instrumental variable estimation, and alternative variable definitions. Heterogeneity analyses reveal that the positive effect of EPU on dividends is stronger for: * **Smaller companies:** Smaller firms exhibit a more significant positive response to EPU in terms of dividend payouts, likely to signal financial stability and attract investors. * **Non-state-owned enterprises:** Non-state-owned firms show a greater increase in dividends than state-owned enterprises under EPU. This difference may stem from the higher prioritization of shareholder returns and the greater need to mitigate agency problems in non-state-owned firms. * **Companies with lower equity concentration:** Firms with less concentrated ownership show a stronger positive relationship between EPU and dividends, potentially reflecting the need to balance shareholder interests and reduce agency costs. * **Companies with low financing constraints:** Firms with ample internal financing resources are more likely to increase dividends in response to EPU, possibly to signal financial health and manage risk. Mechanism analysis indicates that the effect of EPU on dividends is channeled through increased investor demand for dividends (as evidenced by changes in the dividend premium), increased agency costs (as evidenced by management fee ratios), and reduced growth opportunities (implied by reduced firm investment opportunities). Further analysis demonstrates that while EPU negatively impacts firm value, the increase in dividend payouts associated with high EPU partly mitigates this negative effect. This suggests that a positive cash dividend policy can help offset some of the negative consequences of EPU on firm value, aligning with the shareholders' wealth maximization objective.

This study's findings contribute to the literature by providing robust evidence on the positive relationship between EPU and cash dividend policies in China. This contrasts with prior research emphasizing EPU's predominantly negative impact on various corporate policies. The heterogeneity analyses highlight the importance of considering firm-specific characteristics when analyzing the impact of macroeconomic factors on corporate decisions. The identified mechanisms demonstrate how EPU influences dividend policies through investor behavior, agency costs, and growth opportunities. The finding that increased dividend payouts can mitigate some of the negative impact of EPU on firm value provides further support for the importance of proactive dividend strategies during periods of macroeconomic uncertainty. The findings have implications for policymakers in China, who need to carefully weigh the costs and benefits of frequent policy adjustments, and for corporate managers, who must make informed decisions about dividend policies in the face of uncertain economic conditions.

This paper contributes significantly to the understanding of how EPU impacts corporate dividend policies, particularly within the context of the Chinese market. Key contributions include the robust evidence demonstrating a positive relationship between EPU and dividend payouts, the identification of key firm characteristics moderating this relationship, and the elucidation of the underlying mediating mechanisms. Future research should explore alternative measures of EPU, investigate additional mediating mechanisms, and consider the impact of corporate governance on the relationship between EPU and dividend policies.

The study relies primarily on media-based EPU indices, which may be subject to biases and limitations. The causality between EPU and dividend policy is inferred from statistical relationships, and it is possible that other unobserved factors may be influencing the results. Future research could explore more comprehensive measures of EPU and incorporate additional control variables to address these limitations. The focus is on listed companies in China, limiting the generalizability to other types of companies or different national contexts.