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Hello, the following text is an answer to this questions: Does national culture affect corporate payout...

Hello, the following text is an answer to this questions: Does national culture affect corporate payout policy? Explain using examples from your readings or from current events.
PLEASE EXPLAIN IF YOU ARE IN FAVOUR OF THAT ANSWER. WHAT ELSE CAN YOU ADD? WHAT PART OF THAT ANSWER ARE YOU IN FAVOUR OR NOT AND WHY?

The impact of culture can be traced in all aspect of professional lives; thus, its impact in corporate pay out policy cannot be ignored. Different countries with different cultures have various expectation regarding to dividend pay out.

From different cultural dimensions, two factors have the most effect which are uncertainty avoidance(UA) and long-term orientation (LTO). These two variables can be relatively controlled through corporate governance.

In UA, members of this culture feel susceptible by unknown situation, so they prefer more anticipated result which is higher level of dividend. In this situation, the managers try to keep more cash and pay out less to tolerate uncertain future financial difficulty, but the investors prefer the theory of bird-in-the-hand. The balance between corporate governance and investors rights protection define the amount of pay out.

In strong LTO, based on self-reliance and thrift, today’s cash consumption forgoes to receive more in future. Therefore, the pay out level decreases and firm accumulate earning for better long term investment.

Other factors such as such as Masculinity, Individualism, and Power distance have lesser effect in compare to previous factors. For example, the society with masculinity, focuses more on performance, so managers keep cash and use it when opportunities arise.

Another important factor is rate of taxation. Investors in the countries with lower tax rate on dividend prefer higher pay out. In the other hand, investors in high rate tax on dividend prefer DRIP or repurchase if the tax on capital gain is lower than dividend.

Finally, in the countries that shareholders have weaker legal rights, dividends are not linked to firm growth. Rather, they are seen as a way to praying wealth loose from hands of controlling shareholders (Ross, page 675)

Solutions

Expert Solution

In my opinion, National Cultures do affect Corporate Management Decision including PayOut Decisions. As quoted in the Answer given, there are 2 factors have the most effect which are uncertainty avoidance(UA) and long-term orientation (LTO) on Corporate Payouts. But personally i don't think that these two variables can be relatively controlled through corporate governance. Both these variables are characteristics that determine corporate decisions and not the other way round.

In UA, members of this culture feel susceptible by unknown situation and therefore, prefers more payout just because they fear huge risk of future uncertainty and prefers current dividend income over capital growth

In LTO, based on self-reliance and thrift, today’s cash consumption forgoes to receive more in future. This instinct is developed over time based on past experience and performance.

Also, The nature of the industry in which the company belongs has an important effect on the dividend policy. Industries, where earnings are stable, may adopt a consistent dividend policy as opposed to the industries where earnings are uncertain and uneven.

Also, in 21st century, where there is an era of Startups, New companies tend to hold a major chunk of their reserves for future growth and uncertainties. We are more inclined towards taking more risk and making big when compared to our elders who prefer a stable 9 to 5 job.

The economy's history also plays a vital role in deciding the corporate policy. For eg, India has had a past of being ruled by British, high political uncertainty, cultural difference and hence, companies prefer a stable approach to understand the dynamics of population. Whereas in western counties, like Germany, they have a much stable economy and companies can take additional risk in exploring new venture. Hence, The Average payout for companies in India will be much more than average payout of companies in Germany.


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