Import competition and financial flexibility: Evidence from corporate payout policy

Import competition and financial flexibility: Evidence from corporate payout policy

International Review of Economics and Finance 63 (2019) 382–396 Contents lists available at ScienceDirect International Review of Economics and Fina...

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International Review of Economics and Finance 63 (2019) 382–396

Contents lists available at ScienceDirect

International Review of Economics and Finance journal homepage: www.elsevier.com/locate/iref

Import competition and financial flexibility: Evidence from corporate payout policy Laurence Booth a, Mengying Wang b, Jun Zhou c, * a b c

Rotman School of Management, University of Toronto, 105 St George Street, Toronto, ON, M5S 3E6, Canada College of Management, University of Massachusetts Boston, 100 William T Morrissey Blvd, Boston, MA, 02125, USA Rowe School of Business, Dalhousie University, 6100 University Avenue, Halifax, NS, B3H 4R2, Canada

A R T I C L E I N F O

A B S T R A C T

Keywords: Import competition Financial flexibility Payout policy

This study examines the impact of import competition on a firm's preference for financial flexibility by examining corporate payout policy. We confirm existing results that firms with greater exposure to import competition are less likely to pay regular dividends and pay less. We extend these results by showing that firms subject to greater import competition are less likely to initiate or increase regular cash dividends, and are more likely to decrease or omit them. Further, we are the first to show that for firms that have a positive cash payout there is a clear preference for the flexible distribution channel when faced with more intense import competition.

1. Introduction Import competition has intensified over the past few decades as trade policy barriers and transportation costs have declined, and more emerging market firms have entered the global market. In 1983, on average, less than 10% of U.S. demand for manufacturing products was satisfied by imports but by 2011 this had increased to over 35%. Consequently, how firms respond strategically to import competition is an important research question. Several studies have examined operating decisions such as a firm's exit/entry, business reallocation, or investment decision (Bernard, Jensen, & Schott, 2006; Fresard & Valta, 2016; Liu, 2010; Liu & Rosell, 2013). However, there is only limited research on whether and how firms adjust their financial policies in response to the competitive pressure from foreign rivals. For example, Xu (2012) has examined the impact of import competition on a firm's capital structure. Booth and Zhou (2015) have examined the impact of product market power, one aspect of which is measured by import competition, on a firm's dividend policy, while Zhou, Booth, and Chang (2013) have shown that increasing import competition partially contributes to the disappearing dividend phenomenon documented by Fama and French (2001). This paper extends this line of research on financial policies and examines the impact of import competition on a firm's choice between cash distribution channels that offer different levels of financial flexibility. We follow the lead of DeAngelo, DeAngelo, and Skinner (2008) who, in their comprehensive review of corporate payout policy, emphasize that besides ‘how much and when’, a comprehensive analysis of payout policy should also explain ‘how’, i.e. through which channel firms distribute cash to their shareholders. The impact of import competition on the choice of distribution channels has not hitherto been examined. There are three possible ways to distribute cash to shareholders: regular dividends, special dividends, and share repurchases; however, they are interpreted differently by investors. A well-known empirical regularity, for example, is that firms are reluctant to change their regular dividend payment because it is a long-term commitment with signalling and agency implications. In contrast,

* Corresponding author. E-mail addresses: [email protected] (L. Booth), [email protected] (M. Wang), [email protected] (J. Zhou). https://doi.org/10.1016/j.iref.2019.05.001 Received 28 June 2018; Received in revised form 11 May 2019; Accepted 14 May 2019 Available online 15 May 2019 1059-0560/© 2019 Elsevier Inc. All rights reserved.

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special dividend payments and share repurchases are both more flexible; the former is usually regarded as a one-time event while the latter lacks an ongoing fixed commitment. Hence, we sort the three ways into two cash-distribution channels according to their flexibility; the first is the regular dividend channel and the second is the flexible distribution channel including both special dividends and share repurchases. We conjecture that import competition would have different implications for the regular dividend and flexible distribution channels, and lead to the latter being chosen so firms can maintain financial flexibility in an intensified competitive environment. We use a sample of manufacturing firms in the United States over the period 1984–2012 to examine the effect of import competition on the regular dividend and flexible distribution channels. To gauge an individual U.S. firm's dynamic exposure to import competition, we construct a measure, import penetration, based on the proportion of domestic market demand fulfilled by U.S. imports and the sales distribution of the firm across industries. The firm-level import penetration is a sales-weighted average of the market share of U.S. imports in each industry in which the firm operates. We first investigate the regular dividend channel of cash distribution, and find that firms more exposed to import competition are less likely to pay regular dividends and they pay less. Though they use different sample periods, these findings confirm the prior work of Zhou et al. (2013) and Booth and Zhou (2015). Moreover, we find that firms facing greater import competition are less likely to initiate or increase regular dividends, and instead are more likely to cut or omit it entirely. These results paint a vivid picture of regular dividend choice in response to import competition. We then turn to examining the flexible distribution channel. As local firms get more exposed to import competition, their cash reserves can help preserve financial flexibility and comparative advantage (Fresard, 2010). Hence, they are less willing to distribute cash to shareholders. However, if they decide to pay out cash, they prefer special dividends and share repurchases to regular dividends. Consistently, our tests using the whole sample show import penetration has an insignificantly positive effect on the choice of the flexible distribution channel. Moreover, our multinomial logistic regression results provide further support. We find firms with greater exposure to import competition are less likely to choose only the regular dividend channel or both distribution channels simultaneously, while the effect of import penetration is positive but insignificant on choosing the flexible distribution channel only. However, our tests using a subset of firms paying out cash clearly show that firms more exposed to import competition not only prefer the flexible distribution channel but also pay out a larger share of cash through this channel. Import penetration may capture the competitive threat from foreign rivals and induce further competition in U.S. domestic markets, but it may still be an imperfect measure of the decline in a firm's market power. To address any concern for omitted variables related to other aspects of product market competition, we consider three measures of product market competition based on the textual analysis of firm 10-K product descriptions in Hoberg and Phillips (2010, 2016), and Hoberg, Phillips, and Prabhala (2014). Our results are robust to the inclusion of the three measures of domestic competition. This paper contributes to an emerging literature that investigates the impact of import competition on corporate decisions, such as firm refocusing (Liu, 2010), entry/exit decisions (Bernard et al., 2006), business reallocation (Colantone & Sleuwaegen, 2010), investments (Fr esard & Valta, 2016), capital structure (Xu, 2012), and dividend policy (Booth & Zhou, 2015; Zhou et al., 2013). We complement the literature by studying the “how” of payout policy: how firms select the way to distribute cash to shareholders to cope with intensified import competition. Moreover, our results on the effect of import competition on corporate payout policy are robust to the inclusion of other measures of domestic product market competition developed by Hoberg and Phillips (2010, 2016), and Hoberg et al. (2014). Hence, our paper also contributes to the market structure literature by pointing out that import competition adds an important component to capture product market rivalry. The remainder of the paper is organized as follows: Section 2 reviews related literature and proposes several hypotheses; Section 3 describes the data and defines variables; Section 4 presents the empirical findings; and Section 5 summarizes our findings and concludes. 2. Literature review and hypothesis development In his classic dividend paper, Lintner (1956) describes how he structured his field research on a carefully selected sample of 28 U.S. firms created to “encompass a wide variety of situations”. He noted “the belief of many managements that most stockholders prefer a reasonably stable rate and that the market puts a premium on stability or gradual growth in rate were strong enough that most managements sought to avoid making changes in their dividend rates that might have to be reversed within a year or so” (page 99). In other words, the feedback from Lintner's field research was that dividend policy was not a residual as hypothesized by Miller and Modigliani (1961). More recently, Lintner's results were confirmed by Brav, Graham, Harvey, and Michaely (2005) who surveyed 384 financial executives. These senior executives judged that maintaining the dividend and initiating new investment can be equally important for many firms. Further, the existing dividend level was inflexible and to be cut only in extreme circumstances with a big penalty for reducing or omitting the dividend. Instead, these executives would prefer to raise external funds rather than cut the dividend because the dividend was seen as conveying information to shareholders and was liked by both institutional and retail investors. Of interest is that these executives saw share repurchases, which were nonexistent during Lintner's era and only became a feasible part of corporate payout policy since the early 1980s, being more flexible and a substitute for dividends. In addition to Brav et al.’s survey on payout policy, Graham and Harvey’s (2001) survey of financial executives indicated that maintaining financial flexibility was the most important determinant of their capital structure decisions.1 DeAngelo and DeAngelo (2007) also argued that this desire to preserve financial

1 Denis (2011) defines financial flexibility as “the ability of a firm to respond in a timely and value-maximizing manner to unexpected changes in the firm's cash flows or investment opportunity set” (page 667).

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flexibility drives financial decisions such as capital structure and payout policy. The importance of preserving financial flexibility is in part determined by a firm's business environment, particularly competitive pressures from rival firms. In the face of stronger competitive pressure, any shortage in cash flow or missed investment opportunity may cause a firm to lose customers or lag behind its competitors, and might even trigger future losses. Theoretical and empirical studies have shown that product market competition has a strong impact on a firm's business risk using traditional market concentration measures and the Lerner Index (Booth, 1981; Gaspar & Massa, 2006). More recently, Hoberg et al. (2014) develop a new measure of product market rivalry based on the textual analysis of individual firms' 10-K description of products and find market threats results in increased cash holding and reduced dividend payouts. Booth and Zhou (2015) document the positive effect of market power on a firm's dividend policy through the business risk channel. In addition to domestic market threats, competitive pressures from foreign rivals, along with trade liberalization and the integration of global markets, have played an increasingly important role in shaping U.S. firms’ operating decisions and financial policies. For instance, Xu (2012) finds that the rise in import competition leads firms to reduce their leverage ratios by issuing equity or repaying debt. Fresard and Valta (2016) find that firms strategically cut off capital investment due to tariff reductions. Zhou et al. (2013) re-estimate the Fama–French dividend model by including the impact of import competition and show that increasing import competition can help partly explain the disappearing dividend phenomenon. The conclusion from prior research is that import competition has a negative impact on the stability and/or sustainability of future cash flow, and hence changes corporate decisions so that firms can preserve financial flexibility. Although prior studies document that import competition has a negative effect on dividend policy (Booth & Zhou, 2015; Zhou et al., 2013), we lack evidence of its impact on corporate payout policy that consists of special dividends and share repurchases in addition to regular dividends. The literature also shows that the selection of proper cash distribution channels is an important aspect of corporate payout policy (Jagannathan, Stephens, & Weisbach, 2000; Lie, 2005). In a comprehensive review of corporate payout policy, DeAngelo et al. (2008) emphasize that besides ‘how much and when’, a comprehensive analysis of payout policy should also explain ‘how’, i.e. through which channel(s) firms distribute cash to their shareholders. Hence, we focus on investigating the impact of import competition on the “how” of payout policy. While Zhou et al. (2013) include share repurchase as part of the absolute decision to initiate a cash payout, they do not look at the general question of using share repurchase as part of a more flexible cash distribution channel after this payout initiation decision has been made. The impact of import competition on the “how” of corporate payout policy, that is, the choice between alternative distribution channels in the general setting has not previously been examined. We therefore propose to test two hypotheses. We first examine whether firms withdraw from the regular dividend channel in response to increased import competition, because this channel is too rigid to keep financial flexibility. Hypothesis 1. Firms more exposed to import competition are less willing to distribute cash to their shareholders through the regular dividend channel. The implication of competition for dividend policy has been examined in prior studies (Booth & Zhou, 2015; Hoberg et al., 2014; Zhou et al., 2013). In our empirical analysis, we provide four extensions of their work. First, we use a firm-level measure of import competition, which captures a firm's diversification strategy and dynamic exposure to import competition if the firm operates in multiple industries, and is consistent with recent research (Li, Wan, & Wang, 2018; Liu & Rosell, 2013). Second, we broaden the analysis to include the impact of import competition on changes in using the regular dividend channel, that is, decisions to initiate, increase, decrease, or omit regular dividends. Third, we use a multinomial logistic regression to study a firm choice of cash distribution channels: only the regular dividend channel, only the flexible distribution channel, and both channels. Last, but not least, we include three domestic measures of product market rivalry to see whether these measures subsume the explanatory power of import competition. Examining the impact of market competition from different perspectives is important and import competition is an important dimension of market rivalry to payout policy. Next, we directly test whether import competition induces firms to choose the flexible distribution channel over regular dividends because special dividends and share repurchase are relatively flexible for distributing cash. However, there may be competing forces at work because the cash distributed through the flexible distribution channel may still be subject to the negative impact of import competition (Fresard, 2010). Further, there may still be a role for regular cash dividend payments, based on standard signalling and agency arguments. We would therefore expect increased import competition to have a larger impact on lowering regular dividends and a smaller impact on the increased use of the flexible distribution channel. To isolate the preference for financial flexibility, we therefore directly examine the choice between flexible distribution and the regular dividend channel for firms with a positive cash payout, that is, for firms that have already decided to pay out cash. This leads to the following hypothesis. Hypothesis 2. Among firms with positive cash payout, those firms with greater exposure to import competition have a greater preference for the flexible distribution channel. 3. Sample selection and variable definitions The base sample contains all U.S. publicly traded manufacturing firms in the CRSP–Compustat merged database over the period 1984–2012 since share repurchases only became a significant part of corporate payouts after the Securities and Exchange Commission (SEC) changed Rule 10b-18 in 1982. This rule specifies the circumstances under which firms can repurchase shares without being subject to the anti-manipulative provisions of the Securities Exchange Act of 1934 (Grullon & Michaely, 2002). The sample ends in 2012 because the data used to compute the measure of import competition are only available up to 2011. 384

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Two channels of corporate payout are considered: the regular dividend channel and the flexible distribution channel. The regular dividend channel contains taxable cash dividends that are identified from the Center for Research in Security Prices (CRSP) database with distribution codes of 1212, 1222, 1232, 1242, and 1252. These dividends are distributed at monthly, quarterly, semi-annual, or annual frequencies. The flexible distribution channel contains two ways of distributing cash to shareholders: special dividends and share repurchases. Following DeAngelo, DeAngelo, and Skinner (2000) we define a special dividend as a dividend distribution with a distribution code of 1262 or 1272, the distribution codes CRSP employs to identify dividends labeled year-end, final, extra, or special dividends. Following Fama and French (2001) and Skinner (2008), we define net repurchases as share repurchases minus shares issued for various purposes. More specifically, if a firm uses the treasury stock method for repurchases, net repurchases are equal to the increase in common treasury stock (TSTKC). If a firm uses the “retirement” method instead (which is inferred from the fact that treasury stock is 0 in the current and prior year), we measure repurchases as the difference between stock purchases (PRSTKC) and stock issuances (SSTK) from the statement of cash flows. If either of these amounts (the change in treasury stock or the difference between PRSTKC and SSTK) is negative, net repurchases are set to 0. A firm is defined as using the regular dividend channel in a given year if its regular taxable cash dividend is positive. The level of payment through the regular dividend channel is defined as the aggregate amount of the regular cash dividends paid in a given year divided by total assets. A firm is defined as using the flexible distribution channel in a given year if the sum of its cash distribution through special dividends or share repurchases is positive. Similarly, the level of payment through the flexible distribution channel is the aggregate amount distributed through share repurchases and special dividends in a given year divided by total assets. To measure the intensity of competition from foreign rivals, we use firm-level import penetration following the international trade literature (Cu~ nat & Guadalupe, 2009; Li et al., 2018; Liu & Rosell, 2013). First, we calculate industry import penetration, defined as the proportion of domestic demand that is satisfied by imports (Tybout, 2003). Specifically, the import penetration of industry j at year t is Industry IPj;t ¼

Importj;t Shipmentj;t  Exportj;t þ Importj;t

(1)

Shipmentj,t, Importj,t, and Exportj,t are the values of industry j's total output produced in, imported into, and exported from the U.S. domestic market in year t, respectively. The denominator measures total domestic demand in industry j. We construct the annual industry import penetration for each four-, three-, and two-digit Standard Industrial Classification (SIC) industry by using import and export data compiled by Peter Schott, and the value of shipments data from the NBER–CES Manufacturing Industry Database.2 Next, for firm i in year t, we calculate its import penetration based on the sales distribution of firm i across different industries. Formally, the firm-level import penetration is defined as: IPi;t ¼

X Si;j;t  Indusrty IPj;t

(2)

j

Where si,j,t is the fraction of firm i's segment (industry) sales to its sales in all segments (industries) in year t.3 IP is the weighted average of import penetration, where the weights are derived from the firm's segment sales. Compared to industry-level measures of import penetration, the firm-level measure better captures a firm's diversification strategy and dynamic exposure to foreign competition when a firm operates in multiple industries. It is also consistent with the analysis by Hoberg et al. (2014), which explicitly looks at rivalry across product lines and similarly uses firm level data. Higher import penetration implies a lower proportion of domestic product consumed in the home country, which in turn indicates increased competitive pressure created by foreign firms that is faced by all domestic firms.4 We include a list of firm characteristics that are commonly used in the analysis of dividend policy as controls. The accounting variables are retrieved from the Compustat database.  Profitability (Profit) is measured as the operating income before depreciation (OIBDP)scaled by the book value of total assets (AT).  NYSE percentile (NYP) is used to measure firm size. It is equal to the NYSE market capitalization percentile to which a firm belongs, where 1 stands for the smallest percentile and 100 stands for the largest percentile.  Asset growth rate (AGR) is computed as the annual percentage change in total assets.  Market-to-book ratio (M/B) is defined as the ratio of market value of the firm to the book value of its total assets (AT), where a firm's market value is measured as the market value of its equity (stock price (PRCC_F) times shares outstanding (CSHO)) plus the difference between total assets (AT) and book equity (CEQ).  The ratio of cumulative retained earnings to total assets (RE/TA) is computed as the retained earnings (RE) scaled by the book value of total assets.  Stock market return volatility (RETVOL) is estimated as the annual standard deviation of monthly stock returns. Firm-year observations are deleted if data on import competition are not available or if any of the accounting variables are missing.

2 Dr. Peter Schott's website is http://faculty.som.yale.edu/peterschott/sub_international.htm. The NBER–CES Manufacturing Industry Database website is https://www.nber.org/data/nberces5809.html. 3 If a firm has more than one segment in the same industry, its segment sales in the same industry are combined as one segment (industry). 4 Our sample has 5414 firms of which 3599 were unique single-segment firms throughout the time-period, 1145 firms changed corporate structure, i.e. switching between single- and multi-segments, and 670 firms had multiple business segments.

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All the variables are winsorized at the 1% tails to reduce the effect of outliers. The sample screening leaves an unbalanced panel of 52,346 firm-year observations over the period 1984–2012. Table 1 reports the fraction of firm-year observations with positive cash payout and for each of the two distribution channels for each year from 1984 to 2012. The cash payout column indicates that about 50% of our sample has a positive payout; while this varies from year to year there is no obvious trend over time. In contrast, the regular dividend channel shows the disappearing dividend phenomenon documented by Fama and French (2001), as well as the partial “reappearing” dividend payments documented by Chetty and Saez (2005) and Julio and Ikenberry (2004). The flexible distribution channel comprises 31.8% firm-year observations and exhibits a gradual increase over time with significant year-to-year volatility. This volatility is largely driven by share repurchases since only 1.7% of the firm-year observations include special dividends. Compared to regular dividend payments, share repurchases tend to be more cyclical. There is a clear increase prior to the dotcom crash of 2000 and a drop as economic conditions and financial markets deteriorated in 2002. Similarly, we can see the increase prior to the financial crisis of 2008/9 and subsequent rapid decline as the “great recession” took hold. This trend is consistent with Bliss, Cheng, and Denis (2015) and Floyd, Li, and Skinner (2015), where both show that changes in cash payout around the financial crisis are mostly driven by changes in share repurchases. Although the overall preference for special dividends has in part been replaced with that for share repurchase, Hanlon and Hoopes (2014) and Beladi, Chao, and Hu (2016) both show that many firms still use special dividends. Similar to share repurchase, special dividends tend to be volatile over time and, as Beladi et al. (2016) show, are largely driven by the business cycle and market conditions. Some firms use both channels to distribute cash to their shareholders. The last column of Table 1 shows their distribution over time. Overall, about 16.5% of our sample uses both the regular and flexible distribution channels, and its pattern over time is very similar to that of the flexible distribution channel. Table 2 provides summary statistics (Panel A) as well as the pairwise correlation coefficients (Panel B) for the variables used in the empirical analysis. The characteristics of manufacturing firms are very similar to those of previous studies with a broader industry coverage. Panel B shows that payout decisions, through both the regular and flexible distribution channels are positively associated with profitability, size, and cumulative retained earnings, and are negatively associated with growth measures and stock return volatility. More interesting is the relationship of both with import penetration. Although the impact of import penetration on both distribution channels is statistically significant at the 1% level, it is stronger and economically more significant for the decision to use the regular dividend channel.

Table 1 Sample Distribution by Year. This table reports the fraction of sample firms that distributed cash to their shareholders, paid regular dividends, distributed cash to shareholders through flexible channels (share repurchases or special dividends), or used a combination of both channels in each year from 1984 to 2012. The sample includes 52,346 firm-year observations in manufacturing industries. Year

Firms

Cash Payout

Regular Dividend Channel

Flexible Distribution Channel

Both Channels

1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Overall

1687 1795 1790 1786 1823 1841 1816 1821 1815 1864 1971 2116 2228 2295 2313 2209 2000 1881 1906 1807 1747 1668 1619 1546 1510 1485 1416 1325 1266 52346

63.0% 57.7% 54.4% 56.3% 54.6% 52.1% 53.7% 50.0% 49.4% 48.2% 47.4% 48.0% 46.6% 47.9% 52.7% 51.6% 47.5% 46.5% 44.2% 43.7% 43.1% 45.9% 47.3% 50.4% 57.0% 47.8% 49.3% 55.3% 57.4% 50.4%

52.7% 47.6% 43.7% 41.7% 39.8% 38.9% 38.7% 38.2% 38.7% 37.4% 36.3% 35.5% 34.2% 32.9% 32.0% 31.7% 29.9% 28.9% 26.2% 28.8% 31.2% 32.4% 31.9% 31.7% 32.1% 29.5% 29.4% 33.0% 36.3% 35.2%

29.9% 28.2% 27.5% 35.7% 33.6% 31.6% 35.6% 25.5% 23.4% 24.4% 26.2% 28.4% 28.7% 32.2% 39.7% 37.6% 36.0% 31.8% 29.4% 28.0% 26.2% 28.8% 33.2% 38.0% 44.6% 28.7% 32.8% 39.8% 41.0% 31.8%

19.6% 18.2% 16.8% 21.1% 18.8% 18.4% 20.6% 13.6% 12.8% 13.6% 15.0% 16.0% 16.3% 17.2% 19.1% 17.7% 18.5% 14.2% 11.4% 13.1% 14.3% 15.3% 17.8% 19.3% 19.7% 10.4% 12.9% 17.5% 19.9% 16.5%

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Table 2 Descriptive Statistics and Correlation Matrix This table presents descriptive statistics (Panel A) and the correlation matrix (Panel B). The sample includes 52,345 firm-year observations in manufacturing industries during the period 1984–2012. pvalues for the correlation coefficients are reported in brackets Panel A. Descriptive Statistics Mean [1] [2] [3] [4] [5] [6] [7] [8] [9] [10] [11]

Regular Dividend Dummy Flexible Distribution Dummy RegularDividend/TA FlexiblePayout/TA Import Penetration Profit NYP AGR M/B RE/TA RETVOL

Standard Deviation

25th Percentile

Median

75th Percentile

0.4776 0.4656 0.0137 0.0306 0.2005 0.2276 29.0779 0.4084 1.7285 1.4700 0.0890

0 0 0 0 0.0840 0.0247 3 0.0430 1.0897 0.2173 0.0880

0 0 0 0 0.1867 0.1109 14 0.0606 1.4567 0.1643 0.1273

1 1 0.0091 0.0021 0.3206 0.1703 43 0.1954 2.2424 0.3799 0.1843

0.3520 0.3177 0.0070 0.0105 0.2363 0.0519 26.6535 0.1412 2.0431 0.2824 0.1493

N 52346 52346 52346 52346 52346 52346 52346 52346 52346 52346 52346

387

Panel B. Correlation Matrix [1] Regular Dividend Dummy Flexible Distribution Dummy

[3]

RegularDividend/TA

[4]

FlexiblePayout/TA

[5]

Import Penetration

[6]

Profit

[7]

NYP

[8]

AGR

[9]

M/B

[10]

RE/TA

[11]

RETVOL

1.0000 0.2402 [0.0000] 0.6911 [0.0000] 0.1131 [0.0000] 0.1754 [0.0000] 0.3411 [0.0000] 0.4955 [0.0000] 0.0587 [0.0000] 0.1594 [0.0000] 0.3272 [0.0000] 0.4402 [0.0000]

[2]

[3]

[4]

[5]

[6]

[7]

[8]

[9]

[10]

1.0000 0.2257 [0.0000] 0.5014 [0.0000] 0.0159 [0.0003] 0.2368 [0.0000] 0.2246 [0.0000] 0.0220 [0.0000] 0.0775 [0.0000] 0.2121 [0.0000] 0.2267 [0.0000]

1.0000 0.1848 [0.0000] 0.1524 [0.0000] 0.2898 [0.0000] 0.3703 [0.0000] 0.0625 [0.0000] 0.0192 [0.0000] 0.2459 [0.0000] 0.3378 [0.0000]

1.0000 0.0285 [0.0000] 0.1613 [0.0000] 0.1633 [0.0000] 0.0142 [0.0012] 0.0453 [0.0000] 0.1196 [0.0000] 0.1371 [0.0000]

1.0000 0.0418 [0.0000] 0.0249 [0.0000] 0.0078 [0.0745] 0.0105 [0.0166] 0.0784 [0.0000] 0.1283 [0.0000]

1.0000 0.3153 [0.0000] 0.1261 [0.0000] 0.3399 [0.0000] 0.7388 [0.0000] 0.3734 [0.0000]

1.0000 0.0816 [0.0000] 0.0962 [0.0000] 0.2587 [0.0000] 0.3294 [0.0000]

1.0000 0.1889 [0.0000] 0.0850 [0.0000] 0.0630 [0.0000]

1.0000 0.4111 [0.0000] 0.2216 [0.0000]

1.0000 0.3957 [0.0000]

International Review of Economics and Finance 63 (2019) 382–396

[1] [2]

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Table 3 The impact of import competition on the regular dividend channel. Regular Dividend Channel: Payer vs. No Payer

Regular Dividend Channel: Level of Payment

[1]

[2]

1.1766 [0.000] 5.0084 [0.000] 0.0354 [0.000] 0.5173 [0.000] 0.5740 [0.000] 2.8885 [0.000] 11.5257 [0.000] 0.8262 [0.000]

0.0111 [0.000] 0.0725 [0.000] 0.0002 [0.000] 0.0099 [0.000] 0.0010 [0.011] 0.0239 [0.000] 0.1303 [0.000] 0.0055 [0.269]

52,346 0.486

52,346 0.891

Import Penetration Profit NYP AGR M/B RE/TA RETVOL Constant Observations Pseudo R-squared

This table reports the coefficient estimates of the impact of import penetration on a firm's decision to distribute cash to shareholders through the regular dividend channel. We examine the decision to use the regular dividend channel or not (Column [1]), and the level of payment (Column [2]). Column [1] reports the result of a logistic regression model where the dependent variable is a regular dividend indicator variable equal to one if a firm's regular dividend payment is positive and zero otherwise. Column [2] reports the result of a Tobit model, where the dependent variable is the total amount of the regular cash dividend paid in a given year scaled by total assets. Standard control variables are included and lagged one year. The detailed definitions of the variables are included in Section 3. All specifications include year and industry fixed effects where robust standard errors are clustered by firm. P-values are presented in brackets. The McFadden R2 is reported as the goodness of fit measure in the logistic regressions (Column [1]). The pseudo-R2 designed by McKelvey and Zavoina (1975) is used to measure the goodness of fit for the Tobit model (Column [2]).

4. Empirical analysis 4.1. Import competition and regular dividend channel In this section, we examine the impact of import competition on a firm's decision to distribute cash through the regular dividend channel. We start by examining the probability that a firm pays a regular cash dividend using the logistic regression model, where the dependent variable is a binary indicator variable equal to one if a firm pays a regular dividend and zero otherwise. The explanatory variables include the firm-level import penetration measure, as well as the firm characteristics included in Table 2. All the explanatory variables are lagged one year so as to control for the possible endogeneity. The logistic regression also includes industry and year fixed effects.5 Standard errors are clustered by firm in order to account for within-firm correlation of the error terms (Petersen, 2009). The results in Column [1] of Table 3 show that import competition has a strong negative impact on a firm's decisions to pay a regular dividend. The estimated coefficient in the logistic regression on import penetration is 1.1766, and statistically significant at the 1% level. To evaluate the economic significance of import competition, we hold the other variables at their median values and calculate the marginal effect of import penetration (0.2043). Hence, given a one-standard-deviation increase (0.2005) in import penetration, the probability of being a regular dividend payer declines by 0.2005*0.2043 ¼ 4.10%. This is compared to the average regular dividend payer frequency of 35.2%. Column [2] of Table 3 shows the impact of import penetration on the size of the regular dividend payment. Since regular dividends cannot be negative and many firms do not pay a regular dividend, we use a one-sided Tobit model censored at zero. As before, time and industry fixed effects are included with standard errors clustered by firm to account for within-firm correlation of the error terms. McKelvey and Zavoina’s (1975) pseudo-R2 is used to measure the goodness of fit for the Tobit model. The coefficient on import penetration is 0.0111 and statistically significant at the 1% level. To evaluate the economic significance of import competition, we hold other variables at their median values and calculate the marginal effect of import penetration (0.0111). With a one-standard-deviation increase in import penetration, the results imply a decrease in the amount of the dividend of 0.2005*0.0111 ¼ 0.22% of total assets. To put this in perspective, the average dividend paid out as a percentage of total assets in Table 2 is only 0.7%. The results in Table 3 confirm our first hypothesis that firms with greater exposure to import competition have a reduced propensity to pay a regular dividend and when they do, they pay a smaller amount. Table 3 also shows that more profitable, larger firms, those with fewer growth opportunities as measured by a lower growth rate of assets and lower market-to-book ratio, those with more accumulated

5 We do not use firm fixed effect because including firm fixed effects restricts the sample to only 935 firms (17.3% of the firms in our full sample) that have changed their regular dividend status over time.

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retained earnings, and those with lower risk are more likely to distribute cash to their shareholders and are willing to pay out more through regular cash dividends. Table 4 provides further empirical evidence by examining changes in regular dividends, including initiations, increases, decreases, and omissions of regular cash dividends. Column [1] examines the impact of import penetration on dividend initiations. In this case, the sample is limited to those firms that did not pay a regular dividend in year t-1 with the dependent variable an indicator variable equal to one if a firm initiated a regular dividend in year t and zero otherwise. The coefficient estimate on import penetration is again negative and statistically significant at the 1% level, indicating that firms with greater exposure to import competition are less likely to initiate regular cash dividends. Columns [2]–[4] examine dividend increases, decreases, and omissions. The sample used here includes those firms that paid regular cash dividends in year t-1. The dependent variables are then indicator variables equal to one if a firm decides to increase (Column [2]), decrease (Column [3]), or omit (Column [4]) its regular dividend in year t. Consistent with the dividend initiation result, increased import penetration results in a decreased probability of increasing the dividend and instead an increased probability of decreasing or omitting the dividend. The analysis in Table 4 of changes in the regular dividend provides additional evidence to support Hypothesis 1, since firms with greater exposure to import competition shy away from the commitment to make regular divided payments.

4.2. Import competition and flexible distribution channel In this section we investigate the impact of import competition on a firm's decision to adopt the flexible distribution channel. Consistent with the empirical research design in the previous section, we use the logistic regression model to examine whether import competition increases the likelihood of choosing the flexible distribution channel, and the Tobit model for how import competition changes the amount of the cash distributed through the flexible distribution channel. The results are presented in Table 5. Column [1] of Table 5 reports the coefficient estimates of the logistic regression used to investigate the impact of import competition on a firm's decision to use the flexible distribution channel. The dependent variable is a dummy variable equal to one if a firm either repurchases shares or pays a special dividend in a given year, and zero otherwise. The coefficient estimate on Import Penetration is 0.1010 and the corresponding p-value is 0.360. Using the marginal effect to analyze its economic significance, we find that a one-standarddeviation increase (0.2005) in import penetration only increases a firm's probability of using the flexible distribution channel by 0.44%. Compared to the negative effect of import penetration on regular dividend payments, the positive impact on the flexible cash distribution is much weaker in terms of both statistical and economic significance. The results for the Tobit regression on the level of cash payout through the flexible distribution channel are similar. Moreover, the strength of both models [1] and [2] are weaker than the equivalent models for the regular dividend channel both in terms of the size of the coefficients and the overall explanatory power of the models. The comparison of the results in Tables 3 and 5 reveals the difference in the response to intensified import competition between Table 4 The impact of import competition on changes in regular dividend channel.

Import Penetration Profit NYP AGR M/B RE/TA RETVOL Constant Observations Pseudo R-squared

Dividend Initiation

Dividend Increase

Dividend Decrease

Dividend Omission

[1]

[2]

[3]

[4]

0.7583 [0.001] 6.4992 [0.000] 0.0173 [0.000] 0.4216 [0.003] 0.4631 [0.000] 0.6206 [0.002] 3.7571 [0.000] 2.7864 [0.000]

0.4144 [0.015] 7.1926 [0.000] 0.0082 [0.000] 1.4837 [0.000] 0.0996 [0.034] 0.1523 [0.129] 1.9798 [0.000] 0.0387 [0.764]

0.5054 [0.003] 6.9228 [0.000] 0.0062 [0.000] 1.4854 [0.000] 0.0875 [0.056] 0.2911 [0.008] 2.2590 [0.000] 0.2552 [0.053]

0.8053 [0.005] 12.8549 [0.000] 0.0225 [0.000] 0.6091 [0.008] 0.0692 [0.614] 1.7867 [0.000] 8.2268 [0.000] 1.9676 [0.000]

33,936 0.146

18,410 0.125

18,410 0.119

18,410 0.298

This table reports the coefficient estimates of the impact of import penetration on a firm's decision to change its regular cash dividend. Column [1] investigates dividend initiation where the dependent variable is one if the firm initiated its regular dividend in year t, and zero otherwise. The sample is limited to those firms that paid no regular dividend in year t-1 (33,936 observations). Columns [2]–[4] examine regular dividend increases, decreases, and omissions respectively, where the dependent variables are binary indicator variables defined accordingly. The sample is limited to firms that paid positive regular dividends in year t-1 (18,410 observations). All explanatory variables are lagged one year. The detailed definitions of explanatory variables are discussed in Section 3. All specifications include year fixed effects where robust standard errors are clustered by firm. P-values are presented in brackets. The McFadden R2 is reported as the goodness of fit measure. 389

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Table 5 The impact of import competition on the flexible distribution channel. Flexible Distribution Channel: Payer vs. Non Payer

Flexible Distribution Channel: Level of Payment

[1]

[2]

0.1010 [0.360] 2.0795 [0.000] 0.0079 [0.000] 0.2892 [0.000] 0.0241 [0.080] 0.2822 [0.000] 3.5829 [0.000] 0.6312 [0.000]

0.0045 [0.219] 0.0795 [0.000] 0.0002 [0.000] 0.0129 [0.000] 0.0029 [0.000] 0.0075 [0.000] 0.1109 [0.000] 0.0106 [0.233]

52,346 0.112

52,346 0.250

Import Penetration Profit NYP AGR M/B RE/TA RETVOL Constant Observations Pseudo R-squared

This table reports the impact of import penetration on a firm's decision to distribute cash through the flexible distribution channel. Column [1] examines whether firms use the flexible distribution channel or not by using a logistic regression model. The dependent variable is an indicator variable for the flexible channel equal to one if a firm repurchases shares or pays a special dividend in a given year and zero otherwise. Column [2] examines the level of cash payments through the flexible distribution channel by using a Tobit model. The dependent variable is the total amount of share repurchases and special dividends scaled by total assets in a given year. All explanatory variables are lagged one year. The detailed definitions of explanatory variables are discussed in Section 3. All specifications include year and industry fixed effects with robust standard errors clustered by firm. P-values are presented in brackets. The McFadden R2 is reported as the goodness of fit measure in logistic regressions (Column [1]). The pseudo-R2 designed by McKelvey and Zavoina (1975) is used to measure the goodness of fit for Tobit model (Column [2]).

firms choosing the flexible distribution channel and those using the regular dividend channel. As shown in Table 1, about 16.5% of the firm-year observations in our sample use both the regular and flexible distribution channels simultaneously.6 However, in our prior analysis we treat such firms as paying a regular dividend in the analysis in Table 3, but then treat them as using the flexible distribution channel in Table 5. Yet the fact that these firms use both channels indicates that they value the signalling and agency reasons for committing to a regular dividend payment but also value the flexibility of special dividends and share repurchases. In Table 6 we partition the sample into three groups: regular dividend payers only, flexible dividend channel only, and those firms that use both channels, and explore whether these subgroups of firms behave differently from those that do not distribute cash to shareholders. Hence, we use a multinomial logistic regression to study the effect of import competition on the likelihood to choose different payout channels. The three columns report the impacts of import competition and various firm characteristics on choosing regular dividend channel only (Column 1), flexible distribution channel only (Column 2), or both channels (Column 3), relative to the base case of no cash payout. The findings are similar to those documented in previous tables. Consistent with the findings in Tables 3 and 5, firms with greater exposure to import competition are less likely to choose the regular dividend channel (Column [1], the coefficient estimate of Import Penetration is 1.2893 and statistically significant at the 1% level) or choose both distribution channels at the same time (Column [3], the coefficient estimate of Import Penetration is 0.9970 and statistically significant at the 1% level), while the effect of import penetration is insignificant and positive for firms choosing the flexible distribution channel only (Column [2], the coefficient estimate of Import Penetration is 0.0416 and the corresponding p-value is 0.755). The empirical results in Table 6 indicate that the firms using different distribution channels may be fundamentally different. To verify this implication, Table 7 reports the summary statistics for each of the four subgroups. As expected, firms with no cash payout are less profitable, smaller, faster growing firms with higher market-to-book ratios, greater stock market volatility, and a history of losses (as demonstrated by negative cumulative retained earnings). However, among firms with positive cash payout there are also clear differences. Firms using just the flexible distribution channel face the highest degree of import competition at 27.34%, slightly higher even than the no-payout firms (25.88%). However, the distinguishing feature of these firms is that they are profitable and further along the product life cycle since they are slightly larger with a smaller history of losses. Otherwise, their growth options (M/B and AGR) and stock market volatility are most similar to the no-payout firms. In contrast, the regular dividend-paying firms are the largest, most profitable firms with the longest history of profitability, most limited growth options and lowest stock market volatility. Within this dividend-paying group, those using both distribution channels are the largest, most profitable firms of all. In both cases, these regular dividend-paying firms face the lowest level of import competition.

6

The fact that the two distribution channels are not mutually exclusive is consistent with the results in Skinner (2008). 390

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Table 6 The impact of import competition on the choice of payout channels: Multinomial logistic analysis. Regular Dividend Channel Only

Flexible Distribution Channel Only

Both Channels

[1]

[2]

[3]

1.2893 [0.000] 4.6389 [0.000] 0.0370 [0.000] 0.4391 [0.000] 0.6052 [0.000] 2.6170 [0.000] 10.9045 [0.000] 0.8204 [0.000]

0.0416 [0.755] 1.7776 [0.000] 0.0090 [0.000] 0.1901 [0.000] 0.0483 [0.001] 0.2165 [0.000] 2.8238 [0.000] 0.7760 [0.000]

0.9970 [0.000] 7.2504 [0.000] 0.0417 [0.000] 0.8202 [0.000] 0.6017 [0.000] 3.4919 [0.000] 15.1398 [0.000] 0.0428 [0.858]

Import Penetration Profit NYP AGR M/B RE/TA RETVOL Constant Observations Pseudo R-squared

52,346 0.29

This table investigates the impact of import penetration on a firm's decision to distribute cash through the regular dividend channel only, the flexible distribution channel only, or a combination of both channels. The no cash payout firms are used as the default. All explanatory variables are lagged one year. The detailed definitions of explanatory variables are discussed in Section 3. All specifications include year and industry fixed effects with robust standard errors clustered by firm. P-values are presented in brackets. The McFadden R2 is reported as the goodness of fit measure. Table 7 Descriptive statistics of subsamples with different payout channels. Regular Dividend Only subsample

Import Penetration Profit NYP AGR M/B RE/TA RETVOL Observations

Subsample of firms using both channels

Flexible Distribution Channel Only subsample

Subsample of firms with no cash payout

Mean

Median

Mean

Median

Mean

Median

Mean

Median

0.1846 0.1468 42.93 0.1151 1.5663 0.3391 0.1011

0.1422 0.1413 38 0.0699 1.3173 0.3422 0.0916

0.1931 0.1691 49.89 0.1013 1.7854 0.4056 0.0906

0.1355 0.1634 50 0.0659 1.4975 0.4060 0.0822

0.2734 0.0895 21.41 0.1570 1.9134 0.0759 0.1513

0.2217 0.1140 11 0.0666 1.4089 0.1504 0.1326

0.2588 0.0345 14.38 0.1594 2.3486 0.8095 0.1865

0.2106 0.0572 6 0.0462 1.5456 0.0822 0.1643

9777

8649

7979

25941

This table presents descriptive statistics of subsamples of firms that decide to distribute cash through the regular dividend channel only, the flexible distribution channel only, or a combination of both channels, and firms that have no cash payout.

4.3. The Preference for Flexible Distribution Channel The previous sections have shown that import competition has a strong and negative impact on a firm's decision to distribute cash through regular dividends, but its positive impact on the flexible distribution channel is weak and not statistically significant. The insignificant and positive effect of import competition on the flexible distribution channel may be due to the reason that whether to pay out cash is the decision made before the choice of which channel to be used for distribution. As firms are more exposed to international trade, they are more reluctant to pay out cash, but instead reserve more cash to maintain financial flexibility. In this sense, the first order effect of import competition on cash distribution should be negative in general, while the impact of import competition on the choice of cash distribution channels should be the second order, and more important to firms with capacity to distribute cash to their shareholders. To identify whether firms prefer the flexible distribution channel to the regular dividend channel, we must control the first order negative effect of import competition on cash distribution. Thus, we restrict the analysis to firms that have decided to pay out cash – those with a positive cash payout. This reduced sample consists of 26,405 firm-year observations with a positive cash payout. Table 8 reports the results for this analysis. We first run a logistic regression in which the dependent variable is an indicator variable equal to one if a firm only uses the flexible distribution channel and zero if it pays a regular dividend, regardless of whether it also uses the flexible distribution channel. Column [1] reports the estimated coefficient on Import Penetration at 1.3105, which is statistically significant at the 1% level. This supports Hypothesis 2 that firms with greater exposure to import competition are more inclined to distribute cash by share repurchases or special dividends if they have decided to pay out cash. To evaluate the economic significance of this result, we hold other variables at their

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Table 8 The preference for flexible distribution channel. Flexible Distribution Channel vs. Regular Dividend Channel

Import Penetration Profit NYP AGR M/B RE/TA RETVOL Constant Observations Pseudo R-squared

Payout Flexibility

[1]

[2]

1.3105 [0.000] 3.4328 [0.000] 0.0300 [0.000] 0.3698 [0.000] 0.4776 [0.000] 2.1881 [0.000] 7.8167 [0.000] 1.8333 [0.000]

0.5852 [0.000] 1.0668 [0.000] 0.0071 [0.000] 0.0358 [0.268] 0.1783 [0.000] 0.5859 [0.000] 3.1846 [0.000] 0.0111 [0.977]

26,405 0.337

26,405 0.387

This table examines the choice between the flexible distribution channel and regular dividend channel for firms with positive cash payout. The sample contains 26,405 firm-year observations with positive cash payout. Column [1] reports the results of logistic regression analysis, where the dependent variable is an indicator variable equal to one if a firm distributes cash only through the flexible channel, and zero if it pays regular dividends. Column [2] examines the portion of total cash payout through the flexible distribution channel, where the dependent variable, payout flexibility, is defined as the sum of cash distributed through the flexible distribution channel divided by the total cash payout in a given year. Two-sided Tobit model censored at 0 and 1 are used in this analysis. All explanatory variables are lagged one year. The detailed definitions of explanatory variables are discussed in Section 3. All specifications include year and industry fixed effects with robust standard errors clustered by firm. P-values are presented in brackets. The McFadden R2 is reported as the goodness of fit measure in logistic regressions (Column [1]). The peudo-R2 designed by McKelvey and Zavoina (1975) is used to measure the goodness of fit for Tobit model (Column [2]).

median values and calculate the marginal effect of import penetration, which is 0.2137. Hence, given a one-standard-deviation increase (0.1944 in this subsample) in Import Penetration, the probability of choosing the flexible distribution channel increases by 4.15% (¼ 0.1944*0.2137). This is comparable to the fact that 30.2% of firms with positive cash payout use only the flexible distribution channel. An alternative way of examining the importance of the flexible distribution channel is to use a two-sided Tobit model with the dependent variable being the fraction of cash paid out through the flexible distribution channel. The dependent variable is Payout Flexibility (Bonaime, Hankins, & Harford, 2014), defined as the sum of share repurchases and special dividends over total cash payout, that is, for firm i in year t it is defined as follows: Payout Flexibility ¼

Share repurchases þ special dividends Share repurchases þ special dividends þ regular dividends

As the value of Payout Flexibility is a continuous variable between zero and one, the Tobit model is censored at 0 and 1. Column [2] of Table 8 reports the coefficient estimate on Import Penetration is 0.5852 and statistically significant at the 1% level. Using the marginal effect to evaluate its economic significance, we find that a one-standard-deviation (0.1944) increase in import penetration can cause the portion of cash paid out through the flexible distribution channel to increase by more than 11.4%. To put this in perspective, on average about 45% of total cash payouts are distributed through the flexible distribution channel. The results in Table 8 provide support for Hypothesis 2 that firms with exposure to higher import competition are willing to distribute a higher proportion of their cash through the flexible distribution channel once they have decided to pay out cash. In both sets of analysis, we consider the normal set of firm characteristics as control variables. The findings in Table 8 show that less profitable firms, smaller firms, firms with more growth opportunities, firms with less accumulated retained earnings, and riskier firms have a stronger preference for the flexible distribution channel over the regular dividend channel when they are distributing cash to their shareholders. Maintaining financial flexibility is more important for these firms than it is for firms using the regular dividend channel. 4.4. Robustness checks While import penetration may capture the competitive threat from foreign rivals and induce further competition in U.S. domestic 392

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Table 9 Import Competition and Other Measures of Market Competition. This table presents descriptive statistics (Panel A) and correlations matrix (Panel B) of import penetration and three competition measures of domestic product markets developed by Hoberg and Phillips (2010, 2016), and Hoberg et al. (2014), Herfindahl–Hirschman Index (TNIC3HHI), Product Market Similarity (TNIC3TSIMM), and Product Market Fluidity (PRODMKTFLUID). To ensure comparability, we consider import penetration during 1996–2011 because TNIC3HHI and TNIC3TSIMM measures start from 1996 and PRODMKTFLUID measure starts from 1997. p-values of the correlation coefficients are reported in brackets. Panel A. Descriptive Statistics Mean Import Penetration TNIC3HHI TNIC3TSIMM PRODMKTFLUID

Standard Deviation

25th Percentile

Median

75th Percentile

0.2164 0.2250 6.2096 3.4570

0.1260 0.1064 1.1734 4.3502

0.2505 0.1773 1.6377 6.3682

0.4224 0.3404 3.8145 8.9960

0.2945 0.2627 4.3202 6.9652

N 25115 25113 25113 22420

Panel B. Correlation Matrix Import Penetration Import Penetration TNIC3HHI TNIC3TSIMM PRODMKTFLUID

1 0.0639 [0.0000] 0.0176 [0.0052] 0.0871 [0.0000]

TNIC3HHI

TNIC3TSIMM

PRODMKTFLUID

1 0.3329 [0.0000] 0.3355 [0.0000]

1 0.7163 [0.0000]

1

markets, it may still be an imperfect measure of the loss in a firm's market power. For one thing, a significant amount of imports may be the result of integrated supply chains and offshoring by U.S. firms as part of their production. In this case, there may be only limited impact on their market power and risk despite an increase in imports. It is useful therefore to consider import competition in association with other measures that are used to measure market power and competition risk. To address any concern of omitted variables related to other aspects of product market competition, we consider three relatively new measures of product market competition developed by Hoberg and Phillips (2010, 2016), and Hoberg et al. (2014). These measures are based on their textual analysis of firm 10-K product descriptions and their Text-based Network Industry Classifications (TNIC).7 The first measure, the Herfindahl–Hirschman Index (TNIC3HHI), captures market concentration for each individual firm. The second is the total pairwise similarity score (TNIC3TSIMM) between a firm and its competitors in TNIC industries, and measures how closely products from different firms are related. The third is product market fluidity (PRODMKTFLUID), which identifies threats coming from changes in a rival firm's products and measures the structure and evolution of the product space occupied by firms. Data on TNIC and the three competition measures are provided in the Hoberg–Phillips Data Library.8 Table 9 reports the summary statistics (Panel A) and correlation matrix (Panel B) of Import Penetration and the three TNIC-based competition measures. Because the Hoberg and Phillips competition measures require textual analysis and significant processing, the sample starts in 1996 for TNIC3HHI and TNIC3TSIMM, and in 1997 for PRODMKTFLUID. As a result, we have both a smaller sample and shorter time-period for our robustness checks. Firms are exposed to a higher level of domestic competition when they are in less concentrated industries (lower TNIC3HHI), have less differentiated products (higher TNIC3SIMM), or their competitors change products relatively faster (higher PRODMKTFLUID). The correlation between these three measures of competition and import penetration are consistent with these theoretical predictions. Although the correlation coefficients between Import Penetration and three TNIC-based competition measures are statistically significant, their size is quite small, indicating that Import Penetration captures a different aspect of product market competition from the other three measures.9 Since these three TNIC-based measures capture different aspects of product market rivalry, we include each of them in turn in the replication of Tables 3 and 8 to check the robustness of the impact of import competition. Columns [1]–[4] of Panels A and B in Table 10 report the coefficient estimates from the logistic regressions in Column [1] of Tables 3 and 8 and Columns [5]–[8] report the results from rechecking the Tobit regressions in Column [2] of Tables 3 and 8. The first column in Table 10 Panel A repeats that for Column [1] in Table 3 using the reduced sample of 25,073 firm-year observations instead of 52,346. However, the results are almost exactly the same indicating little substantive change for the period 1996–2012 versus 1984–2012. Consistent with the findings in Table 3, firms with greater exposure to import competition are less likely to pay regular dividends, and distribute less cash through regular dividends. Of greater importance is that in Columns [2]–[4] the coefficient on import penetration is little changed and still highly significant. Moreover, the coefficients on the firm characteristics are also largely unchanged. Similar to the findings in Table 8, the results reported in Panel B of Table 10 indicate that among firms with positive cash payout, those facing higher import competition have a greater probability of using the flexible distribution channel and a larger proportion of cash payout distributed through this channel. Of importance is that these results hold at normal significance levels despite the inclusion

7 8 9

Under TNIC, each firm has its own distinct sphere of rivals each year, while the SIC industries place firms in predefined industry categories. These data can be downloaded from the Hoberg–Phillips Data Library (http://hobergphillips.usc.edu). In particular, TNIC3SIMM and PRODFLUID are highly correlated. 393

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Table 10 The impact on payout flexibility: Import competition and other competition measures. Panel A: The Impact on Regular Dividend Channel (Rechecking Table 3). Regular Dividend Channel: Payer vs. No Payer

Import Penetration

Regular Dividend Channel: Level of Payment

[1]

[2]

[3]

[4]

[5]

[6]

[7]

[8]

0.8275 [0.002]

0.7792 [0.004] 0.7176 [0.000]

0.5347 [0.052]

0.5490 [0.055]

0.0095 [0.001]

0.0089 [0.002] 0.0087 [0.000]

0.0064 [0.025]

0.0065 [0.027]

TNIC3HHI

0.3008 [0.000]

TNIC3TSIMM

0.0027 [0.000]

4.2379 [0.000] 0.0291 [0.000] 0.5476 [0.000] 0.5008 [0.000] 2.5135 [0.000] 9.9249 [0.000] 0.0856 [0.722]

4.2171 [0.000] 0.0307 [0.000] 0.5453 [0.000] 0.5012 [0.000] 2.5098 [0.000] 9.8379 [0.000] 0.3608 [0.156]

3.6464 [0.000] 0.0340 [0.000] 0.5352 [0.000] 0.4068 [0.000] 2.3681 [0.000] 9.4136 [0.000] 0.1508 [0.546]

0.2194 [0.000] 3.5580 [0.000] 0.0341 [0.000] 0.4946 [0.000] 0.4049 [0.000] 2.1274 [0.000] 8.6138 [0.000] 0.6988 [0.017]

25,073 0.439

25,071 0.441

25,071 0.462

22,380 0.456

PRODMKTFLUID Profit NYP AGR M/B RE/TA RETVOL Constant Observations Pseudo R-squared

0.0742 [0.000] 0.0002 [0.000] 0.0110 [0.000] 0.0013 [0.018] 0.0195 [0.000] 0.1289 [0.000] 0.0039 [0.317]

0.0738 [0.000] 0.0002 [0.000] 0.0109 [0.000] 0.0013 [0.020] 0.0194 [0.000] 0.1281 [0.000] 0.0084 [0.035]

0.0656 [0.000] 0.0002 [0.000] 0.0105 [0.000] 0.0002 [0.701] 0.0178 [0.000] 0.1232 [0.000] 0.0018 [0.634]

0.0023 [0.000] 0.0656 [0.000] 0.0003 [0.000] 0.0100 [0.000] 0.0005 [0.392] 0.0157 [0.000] 0.1098 [0.000] 0.0024 [0.532]

25,115 0.879

25,113 0.879

25,113 0.893

22,420 0.864

Panel B: The Preference for Flexible Distribution Channel (Rechecking Table 8) Payout Flexibility

Flexible Distribution Channel vs. Regular Dividend Channel

Import Penetration

[1]

[2]

[3]

[4]

[5]

[6]

[7]

[8]

0.9848 [0.001]

0.9173 [0.003] 0.8948 [0.000]

0.6520 [0.040]

0.6526 [0.043]

0.5420 [0.000]

0.5116 [0.000] 0.4241 [0.000]

0.3816 [0.004]

0.3950 [0.006]

TNIC3HHI TNIC3TSIMM

0.2900 [0.000]

PRODMKTFLUID Profit NYP AGR M/B RE/TA RETVOL Constant Observations Pseudo R-squared

0.1291 [0.000]

2.8956 [0.000] 0.0233 [0.000] 0.4170 [0.000] 0.4695 [0.000] 1.9923 [0.000] 6.5995 [0.000] 1.0194 [0.000]

2.8923 [0.000] 0.0251 [0.000] 0.4067 [0.000] 0.4712 [0.000] 1.9825 [0.000] 6.5603 [0.000] 0.7014 [0.008]

2.1310 [0.000] 0.0284 [0.000] 0.3951 [0.000] 0.3818 [0.000] 1.8084 [0.000] 6.4201 [0.000] 1.2869 [0.000]

0.2238 [0.000] 2.1799 [0.000] 0.0285 [0.000] 0.3734 [0.000] 0.3850 [0.000] 1.6319 [0.000] 5.3963 [0.000] 1.8280 [0.000]

12,012 0.285

12,012 0.289

12,012 0.321

10,583 0.313

1.0243 [0.002] 0.0052 [0.000] 0.1007 [0.024] 0.1885 [0.000] 0.5494 [0.000] 2.9546 [0.000] 0.5753 [0.003]

1.0113 [0.002] 0.0059 [0.000] 0.0931 [0.036] 0.1880 [0.000] 0.5395 [0.000] 2.9340 [0.000] 0.7932 [0.000]

0.5483 [0.072] 0.0064 [0.000] 0.0648 [0.136] 0.1423 [0.000] 0.4689 [0.000] 2.7355 [0.000] 0.4550 [0.016]

0.0952 [0.000] 0.6577 [0.042] 0.0073 [0.000] 0.0713 [0.122] 0.1608 [0.000] 0.4449 [0.001] 2.4340 [0.000] 0.3316 [0.110]

12,054 0.403

12,054 0.407

12,054 0.478

10,623 0.413

This table reports the coefficient estimates of the impact of import penetration on a firm's decision to distribute cash and the amount of cash through the regular dividend channel (Panel A); the decision to use the flexible channel for the subset of firms with a positive cash payout (Panel B). The analyses in Panel A and Panel B are identical to those of Tables 3 and 8, respectively, except for the inclusion of three additional competition measures constructed by Hoberg and Phillips as control variables.

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of alternative measures of market competition. Further, in these tests, the coefficients on the firm characteristics sometimes change. The coefficient on profit, for example, drops almost in half as compared to the estimates without the inclusion of these two measures of market power, while the coefficient on the annual growth rate is no longer significant even at the 10% level. These observations indicate that both the similarity and rivalry measures of market competition are correlated with firm characteristics. Our results seem to be robust to the inclusion of the three TNIC-based competition measures. In addition, the signs on the coefficients of the three new measures of competition support our prior theorizing. Firms in less concentrated industries, facing rivals with similar products, and with greater changes in their product mix are more likely to use only the flexible distribution channel and they pay out a greater share through the flexible channel. 5. Conclusion Greater import competition has been a major factor confronting U.S. corporations. As import penetration has on average increased from about 10% in 1983 to over 35% by the end of our time period we can expect it to have consequences. Facing the competitive pressure caused by foreign competitors, firms may respond by adjusting their operational decisions and/or financial policies. This paper investigates the impact of import competition on the choice made by firms deciding to use the regular dividend channel versus the flexible distribution channel in returning cash to their shareholders. Regular dividend payments are regarded by investors as a relatively fixed commitment, so they imply a reduction in financial flexibility. As a result, firms more exposed to import competition should be less willing to use the regular dividend channel and, when they do distribute less. Our empirical results confirm this hypothesis. Further, our empirical results show that greater import competition reduces the probability of initiating a regular dividend or increasing it. In contrast, greater import competition increases the probability of a firm decreasing or omitting a regular cash dividend. Although the overall impact of import competition on use of the flexible distribution channel is not significant at normal levels, this is a significant difference from the probability of paying a regular dividend. Further analysis on firms that have already decided to pay out cash suggests that firms with greater exposure to import competition prefer the flexible distribution channel. These results are robust to the inclusion of other measures of market competition indicating the robustness of the results and the fact that import competition reflects an aspect of product market competition not picked up by domestic measures of rivalry. Our research extends the existing literature by explicitly examining the choice of how to pay out cash, that is, the choice between the regular committed dividend channel and the flexible distribution channel. Previously, this has been a neglected area of research. Acknowledgements The authors are grateful for comments received from seminar participants at the Canadian Economics Association 2015 Annual Conference (Toronto), Financial Management Association International 2017 Annual Meeting (Boston), and 2019 Spring Conference of the Multinational Finance Society (Crete). Jun Zhou gratefully recognize the financial support of the Rowe Research Grant and the Research Development Fund provided by Dalhousie University. Appendix A. Supplementary data Supplementary data to this article can be found online at https://doi.org/10.1016/j.iref.2019.05.001.

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