National Culture and Capital Structure

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National Culture and Capital Structure Abstract Nowadays, many economists accept that culture plays a crucial role in economic outcomes. Existing capital structure theories, in particular the pecking order theory and the agency theory, can be linked to national culture. Furthermore, research in finance has shown the power of incorporating country factors into capital structure analysis. Remarkably enough, at the same time the factor of national culture has not been studied extensively. This paper seeks to determine the influence of national culture on capital structure. I use multilevel data from 1995-2015 covering 40,677 firms from 73 countries. I test for the effect of national culture, using Hofstede’s dimensions, on leverage. Main adaptations of this research are the inclusion of social trust scores and interaction effects between national culture and firm-level factors as predictors of capital structure. The results show that the dimensions of masculinity, uncertainty avoidance and social trust are significant determinants of leverage. No significant effects for individualism, power distance and long-term orientation are found. I also show that moderating effects between culture and firm-level variables play a role in determining leverage. The combination of direct and moderating effects of culture on capital structure suggests that incorporating culture into capital structure research can be very useful.
Faculteit der Managementwetenschappen