Market Power and Dividend Policy: A Risk-Based Perspective

Posted: 9 Nov 2008 Last revised: 18 Dec 2014

See all articles by Laurence David Booth

Laurence David Booth

University of Toronto - Rotman School of Management

Jun Zhou

Dalhousie University

Date Written: November 6, 2008

Abstract

Over the past two decades, by some measures, paying dividends has become a less favorable choice for firms. At the same time, the business environment in which firms operate has also become more competitive. This raises an interesting question: does a firm's market power in its product market have any impact on its dividend policy, that is, is the competitive structure of the industry within which the firm operates important for financial policy? We use three measures of market power, the Herfindahl index, the degree of import competition and the Lerner Index and find that market power positively affects the dividend decision, both in terms of the probability of paying a dividend and the amount of the dividend. We also provide evidence that the route through which market structure affects the dividend decision is business risk: more competitive firms are riskier and less likely to pay dividends than firms with market power.

Keywords: dividend policy, market power, business risk

JEL Classification: G35

Suggested Citation

Booth, Laurence David and Zhou, Jun, Market Power and Dividend Policy: A Risk-Based Perspective (November 6, 2008). Available at SSRN: https://ssrn.com/abstract=1296940 or http://dx.doi.org/10.2139/ssrn.1296940

Laurence David Booth

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

Jun Zhou (Contact Author)

Dalhousie University ( email )

6100 University Avenue
Halifax, Nova Scotia B3H 4R2
Canada

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
1,991
PlumX Metrics