Dividend Policy and Product Market Competition

Abstract

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