The Effect of Product Market Competition and Financing Constraints on Dividend Payout

We examine how product market competition and financing constraints influence firm payout policy. Using Compustat firms for the period 1996 to 2017, we show that competition decreases firms’ propensity to make payouts via dividends more if the firm is financially constrained. These results are consistent with the hypothesis that in the presence of financing constraints, creating internally generated funds (through the reduction of dividends) is more important for firms positioned in competitive markets.