Eleventh Global Studies Conference

Abstract

We study how investor preferences for firm payouts vary with their cultural traits. We argue that dividend initiations and open market share repurchases create implicit, nonbinding commitments for the firm, and investors’ reaction to these announcements may depend on their perception of the likelihood of managers honoring these commitments. We find that trading volume and stock returns to initiations and repurchases are higher in countries that have higher levels of societal trust, and the effect of trust is stronger for repurchase announcements, where the degree of implicitness is more intense. We also find that various other measures of culture, such as individualism, uncertainty avoidance, and long-term orientation, help explain cross-sectional variation in investors’ reaction to these payout announcements. Our study adds to the emerging literature that explores how cultural differences impact financial outcomes, and our findings may be useful to corporate financial managers deciding on whether to initiate a dividend or repurchase shares.