Local Culture and Dividends

• DOI: http://doi.org/10.1111/fima.12118
• Date: 01 March 2016
• Published date: 01 March 2016
• Author: Erdem Ucar

Local Culture and Dividends

Erdem Ucar

I empirically investigate whether geographical variations in local culture, as proxied by local

religion, affect dividend demand and corporate dividend policy for a large sample of US firms.

Firms located in Protestantcounties are more likely to be dividend payers,initiate dividends, and

have higher dividend yields, while firms located in Catholic counties are less likely to be dividend

payers and have lower dividend yields. There is a geographically varying dividend clientele effect

consistent with the variations in risk aversion among different culturalgroups. My results suggest

that firms largely held by local investors determine their corporate policies in line with local

culture.

I examine the impact of culture, defined as the customary beliefs, ideas, values, social forms,

and customs of a social or religious group, on dividend demand and payout policy.1Culture plays

a major role in individuals’ lives. Differences in cultural attributes can lead to variations in atti-

tudes or actions. Culture has an influence on decision making via its impact on attitudes, beliefs,

and values (Guiso, Sapienza, and Zingales, 2006; Grullon, Kanatas, and Weston, 2010). More

importantly, recent studies indicate that cultural groups have different attitudes with respect to

financial and economic decisions (La Porta et al., 1998, 1999; Stulz and Williamson, 2003). Reli-

gion, as a common measure of culture, is particularly useful in shedding additional light on some

phenomena related to investor behavior and corporate decisions (Stulz and Williamson, 2003;

Kumar, Page, and Spalt, 2011; Pantzalis and Ucar, 2014). Payout policies or dividend demand

are closely related to individuals’ attitudes regarding financial outcomes. The dividend clientele

literature (Miller and Modigliani, 1961) argues that investors’ characteristics and attitudes toward

dividend income vary across investor groups, leading to differences in dividend demand. I posit

that culturally induced variations in attitudes are important in explaining issues related to payout

policies.

Following the prior literature, I use religion as a proxy for culture and empirically investigate

whether geographical variations in local religious affiliation affect dividend policy in a large

sample of US firms. There is a signif icant variation in local religious affiliations across the

United States, and my results suggest that this variation is an important determinant of dividend

demand, as well as payout policies. Focusing on the two major religious affiliations in the

United States, I find that there are significant differences between the dividend policies of firms

located in predominantly Protestant areas and those located in predominantly Catholic areas.

Firms headquartered in counties with large Protestant populations are more likely to be dividend

payers, whereas firms from counties with large Catholic populations are less likely to be dividend

payers. Similarly, dividend yields are higher (lower)for f irms located in predominantly Protestant

I would like to thank an anonymous referee, Raghavendra Rau (Editor), Christos Pantzalis, M. Sinan Goktan, Ayca

Altintig, Aslihan G. Korkmaz,and seminar participants at the Financial Management Association 2013 Annual Meeting

and the Southern Finance Association 2013 Annual Meeting for their helpful comments. Any remainingerrors are mine.

Erdem Ucar is an Assistant Professor of Finance in the Barowsky School of Business at the Dominican, University of

California in San Rafael, CA.

1See the following dictionary websites or Guiso, Sapienza, and Zingales (2006): http://www.merriam-webster.

com/dictionary/culture, http://oxforddictionaries.com/definition/english/culture?q=culture.

Financial Management •Spring 2016 •pages 105 – 140

106 Financial Management rSpring 2016

(Catholic) counties. Furthermore, nondividend payer firms headquartered in Protestant areas are

more likely to initiate dividends.

My results can be interpreted based on risk aversion and dividend clientele arguments. Prior

literature suggests that some investors prefer dividends because they perceive dividends as safe

available income for current consumption compared to uncertain future income from equity

investments. Firms cater to these demands through dividend payments. The clientele effect

argument suggests that investors havedifferent preferences and characteristics such that investors

select firms whose payout policies are consistent with their preferences. Prior literature also

highlights differences in investor attitudes and preferences by suggesting that “different cultures

have different attitudes towards finance” (Stulz and Williamson, 2003) and indicates a significant

variation in risk aversion across different religious affiliations. Protestant culture is more risk-

averse than Catholic culture in terms of financial and economic outcomes (Barsky et al., 1997;

Hilary and Hui, 2009; Benjamin, Choi, and Fisher, 2010; Kumar et al., 2011; Shu, Sulaeman,

and Yeung, 2012). Kumar et al. (2011) demonstrate this point through individual investors’ risk-

taking behavior, as well as through corporate decisions and stock returns. In addition, Shu et al.

(2012) support this point by analyzing mutual fund risk-taking behavior. My results suggest that

this difference in risk aversion plays the largestrole in t he geographically varying local dividend

clientele effect demonstrated in this paper.

After controlling for other firm characteristics, I f ind that geographical variation in local

culture, as proxied by local religious affiliation, has an impact on corporate dividend policies.

The findings indicate a statistically and economically significant positive (negative) relation

between dividend policies and firms headquartered in counties with a large Protestant (Catholic)

population. For example, holding other variables constant, a firm headquartered in an area

with an approximately 13% (14%) Protestant (Catholic) population has a significantly higher

(lower) likelihood of being a dividend payer than a similar firm from an area with no Protestant

(Catholic) population. There are similar findings for dividend yield and initiation. My empirical

findings hold after a series of robustness checks. For example, my results remain strong after

controlling for other local economic, demographic, and cultural factors. In addition, using a

sample of firms with location information conf irmed by the Compact Disclosure data provides

even stronger results. My findings are also robust after accounting for the impact of a greater

preference for lottery-type stocks by Catholics as suggested by Kumar et al. (2011) or after

controlling for an alternative set of control variables. Additional tests suggest that my results

emerge through the local culture channel. The results are stronger for firms largely held by local

investors when I examine different local ownership measures. Furthermore, a matched sample

test indicates that local religious affiliations lead to a variation in dividend policies. An analysis

of corporate relocations also provides additional evidence and suggests a change in dividend

policies in line with local cultures in new firm locations. Chief executive officers (CEOs) play an

important role in corporate policies. Therefore, I investigate whether local CEO or local culture

is the primary determinant of my findings and determine that local culture, as proxied by local

religious affiliation, is the main driver of the geographically varying dividend clientele effect in

my tests.

Dividend policy has attracted a considerable amount of attention in the finance literature. An

important strand of the prior literature focuses on cross-sectional variations in payoutpolicies. The

dividend clientele (or demand side) perspective, dating back to Miller and Modigliani (1961),

investigates the determinants of a firm’s propensity to pay dividends. Miller and Modigliani

(1961) argue that imperfections, such as transaction costs or taxes, lead dividend clienteles to

prefer dividends through variations in investorpreferences. Recent studies find results consistent

with dividend clienteles based on investorcharacteristics, such as investor age or income (Graham

and Kumar, 2006; Becker, Ivkovic, and Weisbenner, 2011). My results suggest a correlation

Ucar rLocal Culture and Dividends 107

between geographical variation in dividend demand and investors’ local cultural or religious

characteristics. I highlight a new type of geographically varying clientele effect induced by local

culture consistent with variations in risk aversion among different cultural groups. My paper is

also related to Baker and Wurgler (2004a, 2004b) who propose that firms cater to investors’

demands for dividends through dividend payouts when investors consider dividend payer firms

more valuable. Moreover, earlier studies suggest that investor risk aversion can lead investors to

prefer dividends over future capital gains (Lintner, 1962; Gordon, 1963). My paper suggests that

local religion affects investor demand for dividends through its impact on investor risk attitudes

and characteristics and firms cater to this dividend demand through their dividend payouts.

The paper is also related to the recent literature regarding local bias. Ivkovic and Weisbenner

(2005) find that individual investors have a higher propensity to invest in local firms due to

an information advantage. Pirinsky and Wang (2006) determine a strong comovement in stock

returns for same-location firms. Gao, Ng, and Wang (2011) examine the effect of location on

capital structure. The locality of investors plays an important role in my results. My findings

highlight the local component of dividends by suggesting a geographically varying dividend

clientele effect induced by local culture. Moreover, I note the stronger impact of local culture

on dividend policies for firms held primarily by local shareholders. This implies that firms with

greater local shareholder bases determine their dividend policies consistent with the investor risk

aversion induced by the local culture.

Recent studies indicate that culture has an impact on economic and financial outcomes (Grin-

blatt and Keloharju, 2001; Stulz and Williamson, 2003; Guiso et al., 2006; Eun, Wang, and Xiao,

2014). Eun et al. (2014) suggest that “culture is an important omitted variable in the literature.”

Hilary and Hui (2009) demonstrate the impact of local religious characteristics on corporate

risk-taking behavior. Kumar et al. (2011) confirm the effect of local culture on investor behavior

and corporate decision making. Pantzalis and Ucar (2014) demonstrate how investor inattention

to firm news can be traced to local religious characteristics. My paper expands on this literature

by presenting the effect of local culture, as proxied by local religious affiliation, on dividend

demand and corporate dividend policies.

My paper is closer in spirit to Becker et al. (2011) who examine local dividend clienteles.

Becker et al. (2011) argue that firms from areas with a higher proportion of senior citizens have a

greater likelihood of being dividend payers due to the dividend clientele based on age. The main

distinction between my paper and their paper is that my paper focuses on the impact of local

culture, as measured by local religion, on payout policies and suggests a new dividend clientele

effect based on local culture. Moreover, my empirical findings are robust to the local senior

population effect for a larger sample and suggest a stronger economic impact of local culture on

geographically varying dividend policies.

The remainder of the paper is organized as follows. The next section presents a short summary

of the data and the sample selection method in addition to the summary statistics. Section II

provides the empirical results. Section III presents the empirical results of additional tests and

robustness checks, while Section IV provides my conclusions.

I. Data, Sample Selection, and Summary Statistics

A. Data and Sample Selection

I follow the sample selection criteria used by recent studies (Grullon et al., 2011) in the

related literature. My sample includes US firms with available dividend data and accounting

information from Compustat and stock price information from CRSP in the period from 1990

to 2010. The sample excludes utilities and financials categories (SIC codes 4900-4999 or SIC