This paper investigates whether the effect of internal corporate governance on the corporate dividend and investment decisions differs depending on the level of product market competition. Many existing literatures have argued that good internal corporate governance leads to increased dividend for investor protection. However, these arguments appear to have overly generalized the realities of complex process of corporate managerial decision making. As long as the purpose of good corporate governance is to increase firm value by inducing an effective operation of corporate resources, shareholders would want not only to receive higher dividends, but also to allow managers to invest in good projects so as to enhance long-term firm value. This paper, therefore, investigates the managerial decisions on dividend payout and investment, the two most important financial decisions with substitutional characters, and how these decisions are being affected by both the competitive and non-competitive product market environments. As far as we are informed, this is the first paper of its kind which analyzes the impact of interaction between internal corporate governance and product market competition on managerial decisions, especially on the dividend payout and investment decision. In a competitive product market in general, as managers are subject to higher default risks and turnover sensitivity to performance, potential agency problems (e.g., overinvestment) tend to decrease. In this context, we hypothesize that in competitive product markets, shareholders permit managers to reduce dividend and increase investment for the purpose of enhancing firm value. On the other hand, in non-competitive product markets where an overinvestment problem still exists, shareholders are likely to be reluctant to follow managers' investment decisions and may ask for higher level of dividend payment instead. As such, we conjecture that in a competitive product market good internal corporate governance induces managers to expand investment expenditure and reduce dividend, and our claim is well supported by the following existing literatures. In competitive product markets: (i) as managers assume higher default and predatory risk, potential overinvestment problems can be reduced (La Porta et al., 2000); (ii) firms have more incentives to increase their market shares by investing in new products rather than in non-competitive product markets (Fellner, 1951; Scherer, 1980); (iii) managers are more likely to be enticed to maximize the productivity sensitivity to investment by minimizing the cost (Nickell, 1996). In sum, in a competitive product market, good internal corporate governance disciplines the managers to use internal capital more on valuable investment than on dividend payout. On the other hand, in a non-competitive product market, managers are more likely to over-invest, and shareholders are more likely to oppose a manager's investment decision and ask for higher level of dividend. The sample of our paper consists of 581 companies listed on the Korea Stock Exchange for the fiscal years from 2004 to 2008. We have chosen to examine the Korean economy so as to avoid estimation bias by controlling for any noisy effect of other external disciplinary mechanisms. The Korean economy is known for its competitive product markets while external corporate governance components such as managerial labor market and market for corporate control require further improvement. As we are investigating the interaction of product market competition and internal governance, we want to remove any external noise other than the product market competition, and the data from the Korean firms allow us the convenience, providing clearer relationship between external and internal governance. In our empirical test, we investigate how internal corporate governance actually affects dividend policies and investment decision making in both competitive and non-competitive product market environments, using interaction variables between internal corporate governance index and competition dummy variables. Additionally, we divide the samples into two groups of firms: those which belong to business groups (chaebol) and stand-alone firms, while carrying out the same analysis for both groups. As firms in business groups have internal capital market that mitigates financial constraint, they are less exposed to the discipline of product market competition than stand-alone firms are. Therefore, in a competitive product market, only stand-alone firms benefit from good internal corporate governance as a way to increase the investment. The empirical results are as follows: in general, good internal corporate governance leads to higher investment and a lower level of dividend or share repurchase in competitive product markets than in non-competitive industries. On the other hand, in non-competitive product markets where managers' overinvestment problem is not properly controlled, good internal corporate governance leads to a higher level of dividend or share repurchase and less investment expenditure. The results are consistent with our hypothesis. We also check to find out whether these findings are influenced by the financing capability of firms by implementing the same analysis to both categories of sample firms, chaebol or independent firms. In the competitive product market, while chaebol firms with good internal corporate governance do not increase investment expenditure, stand-alone firms with good internal corporate governance significantly increases investment expenditure. The result shows that chaebol firms are not affected by product market competition in their investment decision since they have internal product and capital markets. On the other hanThis paper investigates whether the effect of internal corporate governance on the corporate dividend and investment decisions differs depending on the level of product market competition. Many existing literatures have argued that good internal corporate governance leads to increased dividend for investor protection. However, these arguments appear to have overly generalized the realities of complex process of corporate managerial decision making. As long as the purpose of good corporate governance is to increase firm value by inducing an effective operation of corporate resources, shareholders would want not only to receive higher dividends, but also to allow managers to invest in good projects so as to enhance long-term firm value. This paper, therefore, investigates the managerial decisions on dividend payout and investment, the two most important financial decisions with substitutional characters, and how these decisions are being affected by both the competitive and non-competitive product market environments. As far as we are informed, this is the first paper of its kind which analyzes the impact of interaction between internal corporate governance and product market competition on managerial decisions, especially on the dividend payout and investment decision. In a competitive product market in general, as managers are subject to higher default risks and turnover sensitivity to performance, potential agency problems (e.g., overinvestment) tend to decrease. In this context, we hypothesize that in competitive product markets, shareholders permit managers to reduce dividend and increase investment for the purpose of enhancing firm value. On the other hand, in non-competitive product markets where an overinvestment problem still exists, shareholders are likely to be reluctant to follow managers' investment decisions and may ask for higher level of dividend payment instead. As such, we conjecture that in a competitive product market good internal corporate governance induces managers to expand investment expenditure and reduce dividend, and our claim is well supported by the following existing literatures. In competitive product markets: (i) as managers assume higher default and predatory risk, potential overinvestment problems can be reduced (La Porta et al., 2000); (ii) firms have more incentives to increase their market shares by investing in new products rather than in non-competitive product markets (Fellner, 1951; Scherer, 1980); (iii) managers are more likely to be enticed to maximize the productivity sensitivity to investment by minimizing the cost (Nickell, 1996). In sum, in a competitive product market, good internal corporate governance disciplines the managers to use internal capital more on valuable investment than on dividend payout. On the other hand, in a non-competitive product market, managers are more likely to over-invest, and shareholders are more likely to oppose a manager's investment decision and ask for higher level of dividend. The sample of our paper consists of 581 companies listed on the Korea Stock Exchange for the fiscal years from 2004 to 2008. We have chosen to examine the Korean economy so as to avoid estimation bias by controlling for any noisy effect of other external disciplinary mechanisms. The Korean economy is known for its competitive product markets while external corporate governance components such as managerial labor market and market for corporate control require further improvement. As we are investigating the interaction of product market competition and internal governance, we want to remove any external noise other than the product market competition, and the data from the Korean firms allow us the convenience, providing clearer relationship between external and internal governance. In our empirical test, we investigate how internal corporate governance actually affects dividend policies and investment decision making in both competitive and non-competitive product market environments, using interaction variables between internal corporate governance index and competition dummy variables. Additionally, we divide the samples into two groups of firms: those which belong to business groups (chaebol) and stand-alone firms, while carrying out the same analysis for both groups. As firms in business groups have internal capital market that mitigates financial constraint, they are less exposed to the discipline of product market competition than stand-alone firms are. Therefore, in a competitive product market, only stand-alone firms benefit from good internal corporate governance as a way to increase the investment. The empirical results are as follows: in general, good internal corporate governance leads to higher investment and a lower level of dividend or share repurchase in competitive product markets than in non-competitive industries. On the other hand, in non-competitive product markets where managers' overinvestment problem is not properly controlled, good internal corporate governance leads to a higher level of dividend or share repurchase and less investment expenditure. The results are consistent with our hypothesis. We also check to find out whether these findings are influenced by the financing capability of firms by implementing the same analysis to both categories of sample firms, chaebol or independent firms. In the competitive product market, while chaebol firms with good internal corporate governance do not increase investment expenditure, stand-alone firms with good internal corporate governance significantly increases investment expenditure. The result shows that chaebol firms are not affected by product market competition in their investment decision since they have internal product and capital markets. On the other hand, in the case of stand-alone firms who face higher level of financial constraint, interaction between product market competition and internal corporate governance plays an important role in the process of corporate investment decision. d, in the case of stand-alone firms who face higher level of financial constraint, interaction between product market competition and internal corporate governance plays an important role in the process of corporate investment decision.