Product Characteristics, Competition and
Dividends
by
Hoberg, Phillips, and Prabhala
University of Maryland
Discussion by
Gustavo Grullon
Rice University
Motivation

A large theoretical literature examines the
relation between corporate financial
decisions and product market behavior.



Brander and Lewis (AER 1986)
Bolton and Scharfstein (AER 1990)
Most empirical studies focus on the
interaction between capital structure and
product market behavior.


Chevalier (AER 1995)
Phillips (JFE 1995)
Motivation

Recent studies examine the effects of product market
competition on cash holdings and payout policy.

Haushalter, Klasa, and Maxwell (JFE 2007): Find
positive correlation between cash holdings and
concentration measures.


Evidence of predation risk
Grullon and Michaely (2008): Find negative
correlation between payout ratios and concentration
measures.

Evidence supporting agency theory (Outcome
model, LLSV (JF 2000))
This Paper

This paper further contributes to this
literature by examining the interaction
between product market behavior and
corporate payout policy.

Using text-based analysis of product
descriptions in financial statements, the
authors create several measures of product
market behavior:



Product Fluidity or Instability
Product Market Competition
Product Customer Type
Main Results

Firms with more product fluidity have a lower
propensity to distribute cash.



Firms with more unique products and in protected
markets have a higher propensity to distribute cash.



Product fluidity is a forward looking measure of
product market risk.
More risk less dividends.
These firms face less product market risk.
Less risk More dividends.
Firms that sell their products to other firms are more
likely to pay dividends, and prefer dividends over
share repurchases.


Interpretation: Dividends signal stability - this attracts
business clients.
Less risk More dividends.
General Impression

This paper examines a very interesting and
important issue in corporate finance.

I really like:
(1) the new methodological approach to measure
product market behavior.
(2) the strong and consistent findings that firms
with lower risk pay more dividends

I have some suggestions about:




The interpretation of the empirical results
The design of the empirical tests
The measures of competition
Causality
Comment # 1

The main takeaway from this paper is that product
market risk affects corporate payout policy.

The new measures of product market behavior, to
some extent proxy for risk (a good thing, but should
be recognized explicitly).

Alternative explanations:


Investment Opportunities and Growth Options
Unobservable industry effects
Investment Opportunities

Measures of product market behavior could be
proxying for investment opportunities.

For example, firms with more product fluidity have
better investment opportunities and growth options
(e.g., Apple).

Control variables may not be completely capturing
investment opportunities.


Market-to-book: Measurement errors, marginal vs. average q
Sales growth: Backward-looking measure
Industry Effects

Industry fixed effects are important determinants of corporate
payout policy.

Industry fixed effects may be capturing unobservable factors
unrelated to product market risk (e.g., growth options).

Table 3 show that most firms with high product market fluidity
are pharmaceuticals and bio-tech firms.

Is it fair to compare a bio-tech firm (Amgen) to a firm that sells
corporate uniforms (Cintas)?

Include industry dummies (two-digit SIC) in the regressions.
Comment # 2

This paper focuses on the effects of product market behavior
on the propensity to pay dividends and repurchase shares.

Limitation: It assumes that a firm with a dividend yield of
0.001% is similar to a firm with a dividend yield of 5%.




Many firms pay very low dividends just to comply with the
“prudent man” rules.
Big difference in term of institutional holdings (between low div
and high div firms—see Grinstein and Michaely (JF 2005)
Big differences in other characteristics.
The paper should primarily focus on the effects of product
market behavior on payout levels.


Measures: Dividend yield, dividends over assets, etc.
Use Tobit regressions
Comment # 3

Table 2 shows that the localized measure of concentration
(HHI) is



Positively correlated with risk
Negatively correlated with size
Uncorrelated with profitability

Measures of product of market competition may be proxying
for something else.

Similar to the findings using Compustat measures of
concentration (Ali, Klasa, and Yeung (RFS 2009)).


May be capturing declining industries
May be capturing the effect of ignoring private firms
Comment # 4

Some of the relations documented in the paper could
be endogenous.
↑Payouts
→
↑Business customers
↑Business customers

→
↑ Payouts
Need identification strategy to infer causality.
Other Issues

Use the logarithm of total risk as a control variable.

Relation between dividends and risk could be
nonlinear.

Examine the effects of large changes in your
measures of product market behavior on payout
policy.

The matched sample analysis (Table 6) excludes
ROA as a control variable. Not clear why.

Do you winsorize the data to control for outliers?
Conclusion

The paper examines an interesting and
important issue.

Using text-based analysis to measure product
market behavior is a very clever idea.

However, the authors need to do more to
convince the reader that the results are
consistent with their main hypothesis.