The Effects of Corporate Governance and Product Market Competition on Payout Policy under Agency Problems and External Financing Constraints

We examine the effects of corporate governance and product market competition on the payout policy when firms are subject to agency problems and external financing constraints. We find that corporate governance and competition affect corporate payout decisions. In particular, payout can be an outcome of or a substitute for both governance and competition among firms depending on the firms' agency costs of free cash flows and external financing costs. When examining both effects together, we find that product market competition subsumes corporate governance in relation to payout policy. Our results suggest that product market competition as a governance tool can be more effective than other monitoring mechanisms.