Abstract:Using a sample of A-share listed companies for the period 2000-2017, we document a J-shaped relationship between cash dividends and firm value in the Chinese stock market. On average, the relative higher dividend-payers are valued higher than other firms, while non-dividend-payers are valued higher than low-dividend-payers. This conclusion is still valid during business cycles, and after considering firm-level characteristics. The classical dividend theories based on the rational economic participant assumption fail to explain the J-shaped relation. Thus, we try to provide an economic explanation for the J-shaped relation, by expanding the information contents in dividend signaling theory and combining the mispricing theory. We find that: 1) non-dividend-payers and high-dividend-payers signal informative contents, namely, a firm’s high growth opportunities and operating performance, respectively, whereupon these firms are higher valued; 2) positive feedback trading, gambling preferences and arbitrage restrictions lead to under-reaction of investors to dividend information, which strengthens the degree of anomalies. Our paper provides insights for governments to formulate reasonable policies to guide the dividend distribution of listed companies.