Dividend Policy and Product Market Competition
46 Pages Posted: 20 Mar 2007 Last revised: 9 Mar 2019
Date Written: March 7, 2019
This paper shows that firms in more competitive industries pay higher dividends than do firms in less competitive markets. We establish a causal link by showing that an exogenous increase in competition due to large tariff reductions leads to higher dividend payout ratios. Further tests, including a shock to managerial entrenchment, indicate that agency considerations are a plausible channel for the negative effect of concentration levels on dividend payouts. Overall, our findings are consistent with two notions: One, the disciplinary forces of competition induce managers to pay out excess cash; and two, dividends are an outcome of external governance factors.
Keywords: Payout Policy, Dividends, Share Repurchases, Product Market Competition
JEL Classification: G35
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