Does business strategy affect dividend payout policies?

This study examines the relation between a firm's business strategy and its dividend payout policies. Using a comprehensive measure of business strategy based on Miles and Snow's (1978, 2003) theoretical framework, we find that a firm's business strategy affects its dividend payout policies. Specifically, we document that firms following an innovation-oriented business strategy (PROSPECTORS) are less likely to pay, initiate, and increase dividends than those following a cost-effective business strategy (DEFENDERS). We also identify operating cash flow volatility and financial covenant constraints as two potential mechanisms through which innovationoriented business strategy influences dividend payout policies. The business strategy effect is more pronounced in growth firms, the post-financial crisis period, and firms with lower CEO pay-for-performance sensitivity. Our results are robust to various tests, including the IV-Probit model, dynamic panel model, and entropy balanced approach.