Product Market Threats, Payouts, and Financial Flexibility

55 Pages Posted: 17 Mar 2011 Last revised: 7 Sep 2012

Gerard Hoberg

University of Southern California - Marshall School of Business

Gordon M. Phillips

Tuck School of Business at Dartmouth; National Bureau of Economic Research (NBER)

Nagpurnanand Prabhala

University of Maryland - Robert H. Smith School of Business

Date Written: August 30, 2012

Abstract

We examine how product market threats influence firm payout policy and cash holdings. We develop new measures of competitive threats using firms’ product text descriptions. Our primary measure, product market fluidity, captures changes in rival firms’ products relative to the firm’s products. We show that fluidity decreases firm propensity to make payouts via dividends or repurchases and also increases the cash held by firms, especially for firms with less access to financial markets. These results are consistent with the hypothesis that firms’ financial policies are significantly shaped by product market threats and dynamics.

Keywords: Dividends, Repurchases, Payout, Cash, Product Markets, Dynamic Product Markets, Competition

JEL Classification: G35, G30, G31, L10, L21

Suggested Citation

Hoberg, Gerard and Phillips, Gordon M. and Prabhala, Nagpurnanand, Product Market Threats, Payouts, and Financial Flexibility (August 30, 2012). Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1787315 or http://dx.doi.org/10.2139/ssrn.1787315

Gerard Hoberg (Contact Author)

University of Southern California - Marshall School of Business ( email )

Marshall School of Business
Los Angeles, CA 90089
United States

HOME PAGE: http://www-bcf.usc.edu/~hoberg/

Gordon M. Phillips

Tuck School of Business at Dartmouth ( email )

Hanover, NH 03755
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Nagpurnanand Prabhala

University of Maryland - Robert H. Smith School of Business ( email )

4427 Van Munching Hall
College Park, MD 20742-1815
United States
301-405-2165 (Phone)
301-405-0359 (Fax)

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