Agency Problems, Product Market Competition and Dividend Policy in Japan

This study investigates whether product market competition reduces agency problems between controlling shareholders and minority shareholders in Japan. We study Japan because of its salient weakness in investor protection and the severity of agency conflicts. In a large sample of Japanese firms we find that Japanese firms in more competitive industries pay more dividends than firms in less competitive industries. Furthermore, the impact of firm-level agency problems on dividend payouts is weaker in highly competitive industries. The results suggest that product market competition is an effective industry-level governance mechanism that can force managers to disgorge cash to outside investors in Japan. The findings have implications for investors in markets with weak investor protection and severe agency problems.