Market Power and Dividend Policy: A Risk-Based Perspective

Abstract

Over the past two decades, by some measures, paying dividends has become a less favorable choice for firms. At the same time, the business environment in which firms operate has also become more competitive. This raises an interesting question: does a firm's market power in its product market have any impact on its dividend policy, that is, is the competitive structure of the industry within which the firm operates important for financial policy? We use three measures of market power, the Herfindahl index, the degree of import competition and the Lerner Index and find that market power positively affects the dividend decision, both in terms of the probability of paying a dividend and the amount of the dividend. We also provide evidence that the route through which market structure affects the dividend decision is business risk: more competitive firms are riskier and less likely to pay dividends than firms with market power.

Keywords: dividend policy, market power, business risk

JEL Classification: G35