Product market competition, agency cost and dividend payouts: new evidence from emerging market

This paper examines the impact of product market competition on the dividend policy of Indian firms. We have taken product market competition as the proxy of external corporate governance. This study has used 1142 non-financial, non-utility, and non-government Indian firms listed in NSE from 2001 to 2018. For the purpose, five different product market competition and three various dividend measures were employed. Also, the interaction between product market competition (external) and board corporate governance (internal) on dividend policy was examined using a newly developed board corporate governance index (BCGI). The findings suggest that non-competitive firms are more likely to pay higher dividends than competitive firms. Non-competitive firms face more significant agency problems and therefore, pay higher dividends than competitive firms. Finally, the study found that the influence of internal corporate governance on dividends to be much higher and significant in the case of non-competitive firms compared to competitive firms. Overall, the findings of this study offer consistent evidence that external corporate governance and dividend policy are substitutes, and higher agency costs and higher internal governance strengthens this relationship. The outcomes of this study can help the managers to more precisely take dividend decisions by looking at the competition level in the market. The results suggest that managers should pay less dividends when firms operate in a high-competitive industry and vice-versa. The policymakers should design corporate governance norms after considering the competitiveness of the industry.