Persistent issues of Chinese listed companies emphasizing fundraising over shareholder returns remain unaddressed due to inadequate dividend regulations or weak enforcement. Many eligible firms avoid or pay abnormally low dividends, undermining stable return expectations, fuelling speculative trading, and hampering long-term investment and capital market health. To address this, the State Council, CSRC, and exchanges in 2024 introduced the “hard constraint” policy on cash dividends. It features two key improvements: broader coverage, encompassing all eligible listed firms (including non-refinancing ones); and stricter enforcement, with penalties like restricting major shareholders’ share reductions and imposing ST designations on non-compliant firms. This raises a critical question: Can this policy enhance firms’ shareholder return awareness, boost dividend payouts, and improve capital market efficiency?

Based on data from Shanghai and Shenzhen A-share listed companies from 2020 to 2024, this paper adopts a quasi-natural experiment with a DID model to examine changes in dividend behavior among previously low-dividend firms after the implementation of “hard constraint” policy and its economic outcomes. The results show that the policy significantly increases dividend willingness and payouts among low-dividend firms. Heterogeneity analysis indicates a stronger effect in firms with weaker regional legal environments, non-state ownership, severe major shareholder agency issues, and low institutional ownership, highlighting the role of the policy as a critical governance supplement in underdeveloped regulatory and internal governance settings. Additionally, increased dividends post-policy improve stock trading activities and reduce bid-ask spreads and mispricing, enhancing market efficiency.

This paper has the following contributions: (1) It provides direct empirical evidence on the effectiveness of the policy, supplementing the research on China’s dividend regulations. (2) It enriches the literature on how regulatory policies affect corporate financial behavior, offering insights distinct from “threshold dividend” phenomena under prior semi-mandatory policies. (3) It expands the analysis of dividend policy consequences by linking firm payout behavior to market efficiency, providing valuable references for policymakers.