The evolving relation between market competition and corporate payout policy

Abstract

This thesis is the first to investigate the association between market competition, the choice between dividends and stock repurchases as payout methods, and dividend smoothing. Using a sample of U.S. firms in the period 1963-2009, I find that firms in highly competitive industries prefer to pay out through repurchases rather than dividends, perhaps because they are less capable of maintaining stable future profitability. Before 1982, regulatory constraints prevented firms from aggressive repurchase programs. In the post-1982 period, as the introduction of Rule 10b-18 removed the regulatory constraints on repurchases, firms in highly competitive industries demonstrated significantly decreased preferences for paying out dividends and increased preferences for repurchases, which implied substitution of dividends with repurchases. I also show that dividend payers in highly competitive industries tend to keep dividends at a relatively persistent level and distribute increases in earnings through repurchases, thus their dividend levels are smoother than those in less competitive industries. Further, I also confirm the hypothesis of Grullon and Michaely (2007) that high competition is associated with high payout levels.