Languages and dividends

Abstract

We study whether languages are related to corporate dividend policies around the world. Users of languages with a weak future time reference (FTR), such as Japanese and Finnish, do not need to grammatically distinguish future and current events, while users of strong-FTR languages such as French and Italian do. Chen (2013) shows that people who use weak-FTR languages may perceive the future to be nearer and have less precise perceptions of the timing of future events than users of strong-FTR languages. We argue that these perceptions may result in a lower discount rate and a higher valuation of future dividends, leading to a weaker preference and demand for a dividend today. Using a large sample of firms from 19 markets, we find supporting evidence that firms in weak-FTR language markets pay lower dividends than firms in strong-FTR language markets. The results remain robust after a battery of robustness tests, including using a single market with multiple languages and using a difference-in-differences approach in a market with a change of official languages. Further evidence shows that weak-FTR languages are related to a lower implied cost of equity capital and stronger market reactions to dividend changes. Our results offer a new explanation for cross-country differences in dividend policies and add to the research on culture and financial markets.