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Corporate Payout Policy and Product Market Competition

35 Pages Posted: 20 Mar 2007  

Gustavo Grullon

Rice University - Jesse H. Jones Graduate School of Business

Roni Michaely

Johnson@Cornell Tech, Cornell University

Date Written: March 15, 2007

Abstract

This paper investigates whether product market competition affects managers' decision to distribute cash to shareholders. Using a large sample of manufacturing firms, we find that firms in less competitive industries have significantly lower payout ratios than firms in more competitive markets. Further, we find that this negative relation between industry concentration levels and corporate payouts is much stronger among those firms whose overall characteristics make them (a) more likely to have high agency costs of free cash flows and (b) less likely to be the target of predation. In general, our results are consistent with the notion that the disciplinary forces of competition induce managers to payout excess cash and with the idea that corporate payouts are the "outcome" of external factors.

Keywords: Payout Policy, Dividends, Share Repurchases, Product Market Competition

JEL Classification: G35

Suggested Citation

Grullon, Gustavo and Michaely, Roni, Corporate Payout Policy and Product Market Competition (March 15, 2007). AFA 2008 New Orleans Meetings Paper. Available at SSRN: https://ssrn.com/abstract=972221 or http://dx.doi.org/10.2139/ssrn.972221

Gustavo Grullon (Contact Author)

Rice University - Jesse H. Jones Graduate School of Business ( email )

P.O. Box 2932
Houston, TX 77252-2932
United States
(713) 348-6138 (Phone)
(713) 348-6331 (Fax)

HOME PAGE: http://www.ruf.rice.edu/~grullon/

Roni Michaely

Johnson@Cornell Tech, Cornell University ( email )

111 8th Avenue #302
New York, NY 10011
United States

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