It goes without saying that investors want to see a return on their investment and have confidence the organisation they are investing in as the capacity to grow. A dividend payout ratio is the ratio of the total amount of dividends paid out to shareholders relative to the net income of the company. It gives investors an indication of how much return they will receive compared to how much the company keeps to invest in growth.
Dr Byung-Seong Min from the Department of Business Strategy and Innovation has joined colleagues from the Griffith Business School and the Hongkong Polytechnic University to examine the impact of product market competition on dividend payout and share repurchases in Australia in which a full dividend imputation system (i.e. tax credit to shareholders) has been in place since 1987.
They employed a panel data estimation with industry and year fixed effects to examine the role of industry competition on dividend payout and share repurchases and used a sample of ASX200 non-financial firms, including 4,272 observations over the period 1992-2015.
Results show that firms operating in competitive markets are likely to pay more dividends and repurchase more shares to reduce agency costs. The positive relation between industry competition and dividends is stronger among firms where the CEO and the Chairman of the Board are the same person, and among firms with higher market-to-book ratio and higher standard deviation of stock returns. Our results are robust when we account for the impact of franking credit on dividend payment. In the difference-in-difference analysis, we find strong evidence of a casual relation that product competition drives changes in dividend policy.
These findings are consistent with the notion that intense product market competition can mitigate agency conflicts between managers and shareholders, and with the information signalling explanation of market competition. As such, regulators may want to introduce policies that encourage more market competition (e.g., market deregulation) to enhance market efficiency.