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Market power and dividend policy

Laurence Booth (Department of Finance, Roman School of Management, University of Toronto, Toronto, Canada)
Jun Zhou (Rowe School of Business, Dalhousie University, Halifax, Canada)

Managerial Finance

ISSN: 0307-4358

Article publication date: 9 February 2015




The purpose of this paper is to investigate how and why a firm’s product market power affects its dividend policy.


This paper uses three measures of market power? The degree of import competition, Herfindahl-Hirschman index, and Lerner Index? To examine how a firm’s product market power affects its dividend policy. Further, it proposes and tests a risk-based explanation for this impact.


This paper shows that market power positively affects the dividend decision, in terms of both the probability of paying a dividend and the amount of dividend payment. It also provides evidence that the route through which market power affects the dividend decision is business risk: firms with less market power are riskier and hence less likely to pay dividends than firms with more market power.

Practical implications

The results show that product market power may have played an important role in reshaping dividend policy of corporate America.


This study documents the relevance of market power behind dividend policy and therefore adds to the knowledge on the relationship between product markets and corporate financial policies, which is an important and understudied area of corporate finance.



The authors are grateful for the comments received from two anonymous reviewers and Kent Baker (Guest Co-Editor). The authors would like to thank Craig Doidge, David Goldreich, Jan Mahrt-Smith, Louis Gagnon, and Wei Wang for their helpful comments, as well as seminar participants and discussants at the Concordia University, Aarhus School of Business, Ryerson University, Queen’s University and the annual meetings of the Northern Finance Association, Midwest Finance Association, European Financial Management Association, Southern Finance Association, Multinational Finance Society, and World Finance. The authors are grateful to Peter Schott, Gerard Hoberg, and Gordon Phillips for sharing their data. The authors alone are responsible for the work and any error or omission.


Booth, L. and Zhou, J. (2015), "Market power and dividend policy", Managerial Finance, Vol. 41 No. 2, pp. 145-163.



Emerald Group Publishing Limited

Copyright © 2015, Emerald Group Publishing Limited

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