Trade-off between agency problem and growth opportunity on dividend payout policy under product market competition

Abstract

This paper investigates whether or not product market competition affects payout policy. According to literature, issues related to dividend payout policy comprise two competing hypotheses, namely, the maturity hypothesis and the free cash flow hypothesis. The former argues that growth opportunity and dividend payout have a negative relationship, whereas the latter argues that firms tend to increase dividend payouts in order to weaken agency problems. Existing studies seldom discuss the issue, in which dividend payout policy faces the trade-off between growth opportunity and agency problem in different levels of product market competition. Therefore, employing regression analysis, we explored the current issue with US manufacturing firms as samples. The firms show the tendency to retain more cash to expand their growth opportunities and decide to pay fewer dividends in less-concentrated industries. Therefore, the dividend policy of firms is consistent with the maturity hypothesis in less-concentrated industries.