Does business strategy affect dividend payout policies?

Abstract

This study examines the relation between a firm's business strategy and its dividend payout policies. Using a comprehensive measure of business strategy based on Miles and Snow's (1978, 2003) theoretical framework, we find that a firm's business strategy affects its dividend payout policies. Specifically, we document that firms following an innovation-oriented business strategy (PROSPECTORS) are less likely to pay, initiate, and increase dividends than those following a cost-effective business strategy (DEFENDERS). We also identify operating cash flow volatility and financial covenant constraints as two potential mechanisms through which innovation-oriented business strategy influences dividend payout policies. The business strategy effect is more pronounced in growth firms, the post-financial crisis period, and firms with lower CEO pay-for-performance sensitivity. Our results are robust to various tests, including the IV-Probit model, dynamic panel model, and entropy balanced approach.