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Currency magnitude and cognitive biases: Evidence of dividend rounding in Latin America

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  • Castillo, Augusto
  • Rubio, German
  • Jakob, Keith

Abstract

In this article, we contribute to a branch of literature that examines cognitive biases that influence corporate decision making. We examine whether Latin American firms round their dividend distributions based on a managerial heaping heuristic. Heaping is a bias to round numbers even though precise results are desired. Our study focuses on dividends in four Latin American markets with starkly different currency magnitudes. We hypothesize and report that currency magnitude significantly influences the characteristics of rounding observed in the dividend data. From 1990 through 2018, we report that 57% of Colombian dividends are heaped to a one decimal place or less of the local currency. The proportions are 49% for Chilean dividends, but only 11% for Mexican dividends and 2% for Brazilian dividends respectively. Consistent with the prior literature, we also report that the likelihood of heaping of dividends in each country is significantly related to both dividend size, and to the level of information uncertainty faced by firm management.

Suggested Citation

  • Castillo, Augusto & Rubio, German & Jakob, Keith, 2020. "Currency magnitude and cognitive biases: Evidence of dividend rounding in Latin America," The North American Journal of Economics and Finance, Elsevier, vol. 51(C).
    • Handle: RePEc:eee:ecofin:v:51:y:2020:i:c:s1062940819301895
    DOI: 10.1016/j.najef.2019.101101
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    More about this item

    Keywords

    Heaping; Dividends; Currency order of magnitude; Dividend size;
    All these keywords.

    JEL classification:

    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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