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National culture and dividend policy

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Abstract

This interdisciplinary study examines how national culture affects corporate dividend policies. The dividend puzzle is one of the most studied, yet unresolved, issues in financial economics. Prior theoretical and empirical research has suggested several explanations of the dividend puzzle that are rooted mainly in agency, asymmetric information, “bird in hand”, and pecking order theories. The main intuition behind our analysis is that dividend policy may be determined not only by an objective assessment of the severity of agency and asymmetric information problems within a firm, but also by management's and investors’ subjective perceptions of these problems, which hinge on their national culture. Using Schwartz's national culture dimensions, Conservatism and Mastery, we find that Conservatism is positively related and Mastery negatively related to dividend payouts for a sample of 27,462 firm-years from 21 countries between 1995 and 2007. These effects are robust to controls for a wide variety of other determinants of dividend policy – including investor protection, stock market performance, financial system configuration, tax advantage, economic development, and dividend catering premium – and to alternative culture proxies and sub-period windows. Our findings that national culture affects perceptions of and responses to agency and information asymmetry have important implications for policymakers and multinational enterprises.

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Notes

  1. Hofstede and Bond (1988: 6) define culture as “the collective programming of the mind that distinguishes the members of one category of people from those of another”. Continuing, they observe that “Culture is composed of certain values, which shape behavior as well as one's perception of the world”.

  2. Other explanations of the dividend puzzle relate to taxation (Poterba & Summers, 1984) and catering effects (Baker & Wurgler, 2004). International evidence for the catering theory is not conclusive. While Denis and Osobov (2008) and Eije and Megginson (2008) do not find supportive results, Ferris et al. (2008) report results supporting the validity of catering theory in explaining international dividend policies. Our empirical analysis controls for catering effects. More recently, DeAngelo et al. (2006) provide empirical support for a life cycle explanation for dividends, where a firm's dividend payout decision is determined by its future investment opportunities. Although these theories enhance our understanding of corporate dividend policies, the dividend puzzle has not been conclusively solved.

  3. Miller and Modigliani (1961) argue that the “bird in hand” theory is a fallacy, because investors need to reinvest dividends into risky assets. Later research on this issue suggests that dividends have special meaning for investors, and might be a “bird in hand” (e.g., Bhattacharya, 1979). We incorporate “bird in hand” theory in this study because it can help explain the effects of cultural psychology on dividend policy, as we discuss below in the hypothesis development section.

  4. The signaling effect model has been supported by a large amount of literature (e.g., Ofer & Siegel, 1987): announcements of dividend increases are followed by significant price increases, while announcements of dividend decreases are followed by significant price drops. More recently, however, some scholars have begun to doubt this explanation (e.g., Denis & Osobov, 2008). Nonetheless, given strong correlations between dividend changes and stock prices, and consensus among financial officers of resistance to cuts in dividends, signaling is still a major theory used to explain dividend policy.

  5. Another important firm-level agency relationship is that between shareholder and debtholder, which is more complicated and empirically inconclusive. This study focuses on the shareholder–manager agency relationship, as it has been substantially covered by prior literature.

  6. The seven types are Conservatism, Intellectual and Affective Autonomy, Hierarchy, Mastery, Egalitarian Commitment, and Harmony (Schwartz, 1994).

  7. Triandis (2001) notes that of the four dimensions suggested by Hofstede, the Individualism–Collectivism dimension is considered “the most significant difference among cultures” (2001: 907). Since Schwartz's Conservatism dimension is close to Hofstede's Collectivism, it is quite representative in capturing the key differences of diverse cultures in the present study.

  8. We show below that our conclusions on the effects of Conservatism and Mastery persist when we control for the other five dimensions.

  9. For example, by its literal meaning, Harmony seems to be relevant to dividend policy. However, when we examine the individual values under Harmony (world of beauty, protecting environment, and unity with nature), these values do not seem to be related to finance theories of dividend policy.

  10. Security may be viewed from both the family and the firm perspectives. However, the value included under Schwartz's Conservatism is family security, not security in general. Consequently, conservative shareholders would put more emphasis on family security than on firm security, asking for higher dividends instead of retaining more cash within the firm.

  11. A counter-argument can be made that conservative firms are more reluctant to increase dividends out of fear of having to reduce them again in difficult times and jeopardizing their public image. However, as mentioned in Note 3, most of the empirical evidence supporting the signaling effect theory shows that dividends are an effective signal of a firm's long-term prospects. The signaling effect of dividends is based more on long-term outlook than on short-term emotions. This study holds the belief that conservative firms, as opposed to their less conservative counterparts, are more likely to use dividends as signals when expecting long-term favorable prospects (though being aware of possible future setbacks), and are more reluctant to cut dividends when facing temporary difficult times.

  12. Admittedly, more cash does not necessarily secure success, especially for large and mature firms, where redundant cash may be invested by managers in value-destroying projects (e.g., unrelated acquisitions). However, holding other firm-specific characteristics constant, more cash helps firms reduce the chance of bankruptcy (a sign of failure) and pursue good investment opportunities at lower financing costs. Evidence from prior literature implies that cash holdings do not hinder firm performance or represent a source of agency conflicts between insiders and outside investors, and instead are used to support a firm's investment and growth (e.g., Mikkelson & Partch, 2003; Opler, Pinkowitz, Stulz, & Williamson, 1999). Similarly, other studies emphasize the importance of cash to product market success (e.g., Bolton & Scharfstein, 1990). To the extent that rivals face difficulties in accessing funds, the decrease in output price may induce losses for financially weak firms, and possibly drive them out of the market. With firm size, age, and life cycle stage controlled for (as we do in our empirical analysis), Mastery firms are expected to issue less dividends.

  13. For example, Goergen, Renneboog, and Correia da Silva (2005) find that dividends of German firms are often perceived to be more flexible than those of Anglo-American firms. This type of phenomenon might be better explained by institutional factors than by national culture. Dewenter and Warther (1998) find that keiretsu-member firms in Japan have more unstable dividend sequences. They attribute this to the fact that such firms rely less on stability of dividends in dealing with asymmetric information and agency problems. Avizian et al. (2003) show that firms in emerging markets, where financial systems are more bank-oriented and dividends are less effective in transferring information, are more ready to change dividend levels. Admittedly, culture also plays a role in the configuration of a country's financial system (Kwok & Tadesse, 2006). Such role is beyond the scope of the current study; however, in our empirical analysis, we include financial system as a control variable.

  14. We also employ dividend/earnings ratio as a proxy for dividend policy, and obtain qualitatively similar results throughout the subsequent analyses.

  15. Chui et al. (2002) use R&D as a percentage of sales as a proxy for agency costs at the firm level. We do not include this control in our regressions because of missing information on R&D expenses in the OSIRIS database.

  16. Our inferences remain qualitatively similar when we adjust standard errors to allow for country-year clustering.

  17. All specifications reported in Table 3 test for the joint effects of both culture dimensions. In unreported regressions, the variables Cons and Mast retain their predicted signs and statistical significance when entered separately.

  18. Alternatively, one could include country fixed effects to control for country-level characteristics. However, this approach is not possible in our analysis, since the country-level cultural proxies do not vary across time.

  19. We report results of country-level regressions using equally weighted averages. Our inferences are generally not affected when we run tests using country averages weighted by firm size.

  20. Chui and Kwok (2008) examine how Hofstede's four cultural dimensions may affect life insurance consumption around the world. Since Hofstede's data are collected in 1967–1973, to test the robustness of their findings Chui and Kwok employ more updated cultural scores from the GLOBE project (House et al., 2004). Their conclusions remain basically intact.

  21. We note that Hofstede's Individualism is conceptually and statistically opposite to Schwartz's Conservatism. Therefore we expect Individualism to load negatively in support of Hypothesis 1.

  22. Additionally, although we control for three types of ultimate owners, including institutional owners, we concede that isolating foreign owners in our analysis could also be important, given that firms owned by domestic shareholders would be more influenced by national culture than those owned by foreigners. In our sample, the OSIRIS database has national identity information of ultimate owners for only 2298 firm-years. We repeat our main regression in Table 3, adding a dummy variable equal to 1 if a firm is ultimately controlled by a foreign investor. The coefficients on Conservatism and Mastery are still highly significant across both dividend proxies, and the foreign owner dummy variable loads with an insignificantly positive sign.

  23. We obtain similar results (unreported for the sake of space) when we control for industry effects using industry dummies based on the two-digit SIC codes as described in Table 1.

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Acknowledgements

We thank Lubomir Petrasek, Samir Saadi, Sadok El Ghoul, Walid Saffar, seminar participants at the University of South Carolina, and especially Cheol Eun (Consulting Editor) and three anonymous referees for their helpful suggestions. Our research has benefited from comments by participants at the 2008 Academy of International Business Meeting and the 2008 Financial Management Association Meeting. We acknowledge financial support from the Center for International Business Education and Research (CIBER) at the University of South Carolina for this research project. Omrane Guedhami acknowledges financial support from Canada's Social Sciences and Humanities Research Council (SSHRC).

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  1. Moore School of Business, University of South Carolina, Columbia, USA

    Liang Shao, Chuck CY Kwok & Omrane Guedhami

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  1. Liang Shao
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Accepted by Cheol Eun, Consulting Editor, 18 June 2009. This paper has been with the authors for two revisions.

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Shao, L., Kwok, C. & Guedhami, O. National culture and dividend policy. J Int Bus Stud 41, 1391–1414 (2010). https://doi.org/10.1057/jibs.2009.74

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