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Market power and dividend policy

Market power and dividend policy Purpose– The purpose of this paper is to investigate how and why a firm’s product market power affects its dividend policy. Design/methodology/approach– This paper uses three measures of market power? The degree of import competition, Herfindahl-Hirschman index, and Lerner Index? To examine how a firm’s product market power affects its dividend policy. Further, it proposes and tests a risk-based explanation for this impact. Findings– This paper shows that market power positively affects the dividend decision, in terms of both the probability of paying a dividend and the amount of dividend payment. It also provides evidence that the route through which market power affects the dividend decision is business risk: firms with less market power are riskier and hence less likely to pay dividends than firms with more market power. Practical implications– The results show that product market power may have played an important role in reshaping dividend policy of corporate America. Originality/value– This study documents the relevance of market power behind dividend policy and therefore adds to the knowledge on the relationship between product markets and corporate financial policies, which is an important and understudied area of corporate finance. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Managerial Finance Emerald Publishing

Market power and dividend policy

Managerial Finance , Volume 41 (2): 19 – Feb 9, 2015

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Publisher
Emerald Publishing
Copyright
Copyright © Emerald Group Publishing Limited
ISSN
0307-4358
DOI
10.1108/MF-12-2013-0346
Publisher site
See Article on Publisher Site

Abstract

Purpose– The purpose of this paper is to investigate how and why a firm’s product market power affects its dividend policy. Design/methodology/approach– This paper uses three measures of market power? The degree of import competition, Herfindahl-Hirschman index, and Lerner Index? To examine how a firm’s product market power affects its dividend policy. Further, it proposes and tests a risk-based explanation for this impact. Findings– This paper shows that market power positively affects the dividend decision, in terms of both the probability of paying a dividend and the amount of dividend payment. It also provides evidence that the route through which market power affects the dividend decision is business risk: firms with less market power are riskier and hence less likely to pay dividends than firms with more market power. Practical implications– The results show that product market power may have played an important role in reshaping dividend policy of corporate America. Originality/value– This study documents the relevance of market power behind dividend policy and therefore adds to the knowledge on the relationship between product markets and corporate financial policies, which is an important and understudied area of corporate finance.

Journal

Managerial FinanceEmerald Publishing

Published: Feb 9, 2015

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