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.