Does Dividend Policy Affect Sales Growth in Product Markets?: Evidence from a Quasi-Natural Experiment

49 Pages Posted: 3 Jan 2018 Last revised: 25 Aug 2018

See all articles by Atsushi Chino

Atsushi Chino

Nagasaki University

Joon Ho Kim

University of Hawaii at Manoa

Date Written: August 22, 2018

Abstract

Prior literature shows that firms are less likely to pay dividends to preserve financial flexibility when facing greater competitive threats from rival firms in product markets. However, the real effects of dividend policy on product market outcomes are not widely understood. This paper investigates the causal effects of dividend policy on sales growth in product markets. Exploiting the 2003 dividend tax cut as the exogenous shock to dividend policy and the cross-firm variation in the tax status of firms’ largest institutional shareholders, we find that firms’ dividend increases induced by the tax cut reduced their sales growth in product markets in years following the tax cut. Further, those firms exhibited slower growth in investment activities after the tax cut. A battery of robustness checks supports our causal interpretation that dividends reduce firms’ financial flexibility to deploy funds for investing activities, resulting in slower sales growth in product markets.

Keywords: Dividend policy; Product markets; Financial flexibility; Natural experiment

JEL Classification: G35, G32, L10

Suggested Citation

Chino, Atsushi and Kim, Joon Ho, Does Dividend Policy Affect Sales Growth in Product Markets?: Evidence from a Quasi-Natural Experiment (August 22, 2018). Available at SSRN: https://ssrn.com/abstract=3094798 or http://dx.doi.org/10.2139/ssrn.3094798

Atsushi Chino (Contact Author)

Nagasaki University ( email )

4-2-1 Katafuchi
Nagasaki
Nagasaki 850-8506
Japan

HOME PAGE: http://sites.google.com/site/aa84195940/

Joon Ho Kim

University of Hawaii at Manoa ( email )

2404 Maile Way
Honolulu, HI 96822
United States

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