The Effects Of Product Market Competition On Cash Dividend Payment In China

Agent conflict is a common problem facing in corporate governance and underasymmetric information situation, one important task is to solve agency conflictbetween management and shareholders. Dividend policy is an important part ofcorporate governance. Product market competition, as an important supplement forcorporate governance, plays an important role in reducing the information asymmetry.In addition, competition can strengthen the supervision and enhance managementincentives, while reducing shareholder-management agency conflicts, which couldreduce agency costs and improve the company’s efficiency.Previous studies in China concerning dividend policies are often from internalside of company, which has researched the relationship between dividend policy andcompany’s characteristics. However, in western countries, some studies show productmarket competition is considered a substitute for a governance mechanism, andinfluences corporate financial strategies, such as dividend policies. Previous studieshave focused on the relationship between product market competition and dividendpayouts in countries with strong investor protection. We instead investigate the linkbetween product market competition and dividend policy, particularly the influence ofmarket competition on the effect of governance (agency conflict) on dividend policyin China, a country with a weak investor protection. In economies with poor investor protection, minority shareholders are more likely to experience serious agencyconflicts, and are less able to alleviate such problems. The economics literatureindicates that product market competition is a disciplinary market force. However,studies examining the link between product market competition and dividend policyin economies with weak investor protection are scant. We fill this gap by examiningthe effect of product market competition on corporate dividend policy in an economywith weak investor protection.Our empirical results are summarized as follows. We find a nonlinear relationbetween dividend payouts and product market competition. Piecewise regressionanalyses indicate that when competition is low, dividend payouts are negativelyrelated to product market competition (supporting the substitute agency model ofdividends), whereas when competition is high, dividend payouts and product marketcompetition are positively related (supporting the outcome agency model ofdividends). Product market competition substitutes for corporate governance. Firmstend not to pay dividends when governance is weak, and competition reduces theeffect of weak corporate governance on dividend payments...