Import competition and disappearing dividends

Abstract

Import competition has had an enormous impact on the US economy. This paper looks at whether such competition has increased the risk of US firms and is a factor that can partly explain the Fama–French disappearing dividends phenomenon. We show that firms facing more import competition do face more uncertainty in their future performance, and are less likely to pay a dividend. Import penetration through a risk channel has significant explanatory power, even after we include a variety of controls suggested in the literature, as well as Herfindahl index that controls for market power. Further, we can explain a significant part of the disappearing dividends phenomenon. Finally, we also find evidence that import competition contributes to the substitution of share repurchases for cash dividends. We are the first to document the impact that increased import competition and “globalization” have had on the dividend policy of US firms.