Country culture matters: dividend policy when information is asymmetric

Many theoretical/empirical studies address the association between dividend policy and information asymmetry. The theories that directly explore this association assume opposite signs of the relationship. The signaling theory (Lintner, 1956; Bhattacharya, 1979; Miller-Rock, 1985; John-Williams, 1985) highlights that dividends might solve various information gaps and therefore predicts a positive sign of the relationship. From the framework of pecking order hypothesis applied to the financial structure decisions (Myers-Majluf, 1984; Donaldson, 1961 and 1984) a negative sign of the relationship is expected, since more asymmetric are the expectations, lower should be the dividends, since they reduce the re-investable earnings, which are the preferred financing sources.This paper studies what role the country culture plays in this context, by adopting the national culture dimensions from Schwartz (2006) and Hofstede (2011, 2018). The international research has often explored whether differences in national culture can help to explain cross-country differences in various managerial decisions; less emphasis, however, has been observed about impact on dividend policy. The paper objective is twofold: i) to measure the direct impact of cultural dimensions on dividend yield; ii) to measure the mediator effect that the cultural dimensions have on the linkage between dividend policy and information asymmetry, influencing management/investor subjective perceptions of asymmetric information problems within a firm, which hinge on their national culture. The sample is a balanced panel including 319 nonfinancial companies, listed at the STOXX Europe 600 index, over the decade 2010-2019 (i.e., a normal scenario without potential bias deriving from the COVID-19 pandemic), i.e., a total of3.190 firm-year observations. The companies are from 12 countries: Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy, Netherlands, Spain, Sweden, and United Kingdom. Countries are clustered in groups through the culture dimensions: an integrated framework is used, by elaborating a factor analysis to consider the correlations among the culture dimensions by Schwartz and Hofstede approaches and clustering on the basis of the extracted factors. The empirical findings show that the culture matters. The payout policy of country clusters identified by means of the culture dimensions: i) differs; ii) differently reacts to asymmetric information; iii) is differently stable over time; iv) differently reacts to other firm characteristics thattraditionally affect the dividend policy. In sum, asymmetry problems and agency conflicts are determined not only by an objective assessment of their severity, but also by a subjective assessment among individuals of the perceived extent of them, which is captured by culture.