Text-Based Product Characteristics, Competition and Dividends

We show that a firm’s product characteristics are significantly related to its dividend and share repurchase policies. Using text-based analysis of product descriptions in firm 10-Ks, we examine how the propensity to pay dividends and repurchase shares are affected by how a firm’s products evolve over time, the local competition it faces, and the nature of the clientèle for the firm’s products. Dividend payers are more likely to be stable firms with less product fluidity, with differentiated products and in markets that have high local concentration. Firms whose products are more likely to be sold to a business clientèle also have greater propensities to pay dividends but lower propensities to repurchase shares, consistent with firms using dividends to signal their stability to business clientèles. Our product market variables also explain dividend initiations, omissions, increases and decreases. The results are consistent with new hypotheses that firms’ payout policies are significantly shaped by the dynamics of their product market space.