This research examines whether product market competition can mitigate Principal-Principal agency conflicts (i.e., conflicts between controlling shareholders and minority shareholders) in China and force firms to pay dividends. Employing multivariate regressions on a large sample of Chinese manufacturing firms, we find that intense product market competition not only mitigates agency problems and forces firms to pay dividends, but also increases a firm’s probability to pay dividends and weakens the negative association between agency conflicts and dividends. These findings are robust to alternative measures of product market competition. Overall, our findings lend support to the notion that the disciplinary forces of product market competition induce firms to disgorge cash and to the “outcome” agency model of dividends, suggesting that dividends are the outcome of external factors.
Keywords: Product market competition, Agency conflicts, dividends, China.
