Product Market Threats, Payouts, and Financial Flexibility





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    • Hoberg is with University of Maryland. Phillips is with University of Southern California and NBER. Prabhala is with University of Maryland. We thank Harry DeAngelo, Laurent Fresard, Gustavo Grullon, the Editor (Campbell Harvey), an anonymous Associate Editor, an anonymous referee, participants at the UBC Winter Finance Conference and seminar audiences at HKUST, National University of Singapore, Michigan State University, Northwestern University, Notre Dame University, Temple University, and University of Southern California for helpful comments. Any remaining errors are the authors' alone.


We examine how product market threats influence firm payout policy and cash holdings. Using firms' product text descriptions, we develop new measures of competitive threats. Our primary measure, product market fluidity, captures changes in rival firms' products relative to the firm's products. We show that fluidity decreases firm propensity to make payouts via dividends or repurchases and increases the cash held by firms, especially for firms with less access to financial markets. These results are consistent with the hypothesis that firms' financial policies are significantly shaped by product market threats and dynamics.