How does product market competition affect dividend smoothing? Evidence from China

This study examines the influence of product market competition on dividend smoothing in China based on the agency model. Using a sample of the A-share Listed firms in China, evidence shows that the industry competition will negatively affect on the corporates dividend smoothing. When we use the exogenous shock to construct a quasi-experiment to alleviate the potential reverse causality, the result is still robust. More importantly, investor protection and social trust can provide some explanation with the negative relationship. In addition, the results also provide evidence that industry competition can substitute for the external corporate governance mechanism on dividend smoothing. Further, the results suggest that firms in intensely competitive industries smooth dividends less when the agency cost are higher and the financing pressure can moderate the negative relationship between the industry competition and dividend smoothing. To the best of our knowledge, this study is the first to investigate the relationship between industry competition and dividend smoothing based on the agency substitute model in an economy with weak investor protection (China).