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How does national culture affect corporate risk-taking?

Abstract

The aim of this paper is to analyse the effects of national culture and formal institutions on corporate risk-taking. By applying panel data techniques for a sample of large quoted firms from 35 countries over the period of 2007–2014, we document that national culture proxied by Hofstede’s dimensions (power distance, masculinity, individualism, uncertainty avoidance and long-term orientation) influence corporate risk-taking. We also observe that the characteristics and quality of formal institutions in a country can create an environment that promotes risk-taking when corruption perception and financial freedom levels are high. Finally, cultural heterogeneity among shareholders matters for corporate risk-taking, what may help to implement better corporate governance practises. Our research contributes to the existing literature providing further evidence on the direct and indirect effects of national culture on corporate decision-making.

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Notes

  1. Following Li et al. (2013), Kwok and Tadesse (2006) and Licht et al. (2005), we argue that these formal institutions are shaped by national culture values.

  2. Agency relations between different types of shareholders can be more significant than the separation between ownership and control (Bennedsen and Nielsen 2010; Konjin et al. 2011; Ruiz and Santana 2011).

  3. From an agency perspective, type II issues refer to the possible conflict of interest between major and minority shareholders, in companies where ownership structure is highly concentrated (Díez-Esteban et al. 2013).

  4. Karolyi (2016) reports over 92,000 citations of Hofstede’s work on these cultural dimensions from the Financial Times’ 45 journals (according to the Web of Knowledge) over the period 1980–2015, and Aggarwal et al. (2016) note that Hofstede’s work is the earliest and most widely cited among databases on national culture.

  5. Although the analysis of the monitoring role of other reference shareholders is not one of our study focus, we have included a variable (MONITOR) in the empirical model to test the existence of that role in our sample.

  6. Obviously, the influence of other reference shareholders in the decisions of the main shareholder will be conditioned by the power of the latter or, in other words, by their level of participation in the property. This issue has already been analyzed by Konishi and Yasuda (2004).

  7. We calculate the shareholder returns through the formula Ri = (Pt − Pi)/Pi, Pt being the share price at the end of the day and Pi the initial price. If a share was not listed on any given day, we exclude the data from that day to calculate risk.

  8. We consider reference shareholder that owner who owns more than 5% of the capital, as this will allow him to influence the board of directors, appoint managers and intervene in key strategic decisions. Some databases such as Thomson Financial, Marketguide and WorldVest also make use of this ratio to identify the reference shareholders.

  9. This index measures the effectiveness of the monitoring role: PP5 = (P2 + P3 + P4 + P5)/P1, being Pi the proportion of shares owned by each of the first five reference shareholders

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Acknowledgements

This research has been financed by Portuguese Public Funds through FCT (Fundação para a Ciência e a Tecnologia) in the framework of the project UID/ECO/04105/2013. The authors are grateful to participants on the 23rd EBES Conference for their comments on previous versions. All the remaining errors are our responsibility.

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Correspondence to Conrado Diego García-Gómez.

Appendix

Appendix

See Tables 6 and 7.

Table 6 Definition of variables
Table 7 Industry dummy variables

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Díez-Esteban, J.M., Farinha, J.B. & García-Gómez, C.D. How does national culture affect corporate risk-taking?. Eurasian Bus Rev 9, 49–68 (2019). https://doi.org/10.1007/s40821-018-0105-0

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Keywords

  • Corporate risk-taking
  • National culture
  • Formal institutions quality
  • Ownership structure

JEL Classification

  • G15
  • G32
  • G34