Languages and Dividend Policy

Abstract

The Sapir-Whorf hypothesis theorizes that the structure of a language may affect the way that its speakers think. We investigate if there is a significant difference in dividend policy of firms headquartered in a country whose primary language uses a strong future-time reference (FTR) compared with a country that uses a weak FTR language. We posit that use of future tense to describe future events increases the mental distance from the future, and as a result, reduces a person's concern about the future. As today’s dividend policy is determined based on both today’s and future expected performance of the firm, we hypothesize that firms in strong FTR language speaking countries follow a dividend policy to pay out more today than firms in weak FTR language speaking countries. Our empirical results confirm this hypothesis as we find higher dividend payouts by firms in strong FTR countries than in weak FTR countries. We further investigate if firms in strong FTR countries make changes in dividend policy more frequently than firms in weak FTR countries.

Keywords:

• Dividend policy
• Languages
• Sapir-Whorf hypothesis
• Catering theory
• Global differences

Acknowledgment

The authors would like to thank the anonymous referees for providing in-depth suggestions and comments that considerably improved this article.

Notes

1 We test different combinations of year, industry, and/or continent fixed effects in all of our multivariate analyses included in this study and find similar results. For brevity, we do not present results using all combinations of fixed effects tested in this paper.

2 We use the PSMATCH2 Stata module provided by Leuven and Sianesi (2003) to execute the PSM procedure.

3 We already referred to and discussed these firms as ‘stop’ and ‘start’ paying dividend firms in the section, Baseline Results.

4 Using equal-weight dividend premium yields similar results.

Additional information

Funding

This project is partially funded by a grant from FIU Center for International Business Education and Research (CIBER). The authors would like to express their appreciation for the support they have received.