The Impact of Product Market Competition on Firms’ Payout Policy

This paper investigates the interaction between product market competition and managers’ decision to distribute cash to shareholders. Using a large sample of manufacturing firms, we find that firms in more competitive industries pay more dividends than firms in less competitive markets. Further, consistent with agency theory, we find that the effect of product market competition on corporate payouts became significantly stronger after an exogenous event that intensifies the agency conflict between managers and shareholders (the business combination laws adopted by several states in the U.S. during the 1980s and 1990s). Overall, our findings are consistent with the notion that the disciplinary forces of competition induce managers to pay out excess cash and with the idea that dividends are the “outcome” of external factors.