National culture: The missing country-level determinant of corporate governance

Abstract

It is well known that firm-level corporate governance practices vary mainly between rather than within countries, but country-level factors such as legal and financial institutions explain less than 50% of this cross-country variation. In this article we show that two dimensions of national culture – individualism and uncertainty avoidance – capture about 90% of the country fixed effects and outperform the country-level explanatory variables used in prior literature. We argue that culture works through a tradeoff between managerial expertise and certainty of control, a tradeoff largely overlooked by prior literature, that captures a country’s preference for the Anglo-Saxon approach versus the direct control approach for governance. Consistent with this argument, we find that the effect of culture on corporate governance varies across firms with different needs for managerial expertise and certainty of control. We also find that culture interacts with other factors to determine firm-level governance.

Résumé

Il est bien connu que les pratiques de gouvernance au niveau de l’entreprise varient principalement entre pays plutôt qu’au sein des pays, mais les facteurs liés aux pays tels que les institutions légales et financières expliquent moins de 50% de cette variation entre les pays. Dans cet article, nous montrons que deux dimensions de la culture nationale – l’individualisme et le contrôle de l’incertitude – couvrent environ 90% des effets liés aux pays et dépassent les variables explicatives au niveau des pays utilisées dans la littérature antérieure. Nous argumentons que la culture fonctionne comme un compromis entre l’expertise managériale et la certitude du contrôle, un compromis largement négligé dans la littérature antérieure qui explique seulement la préférence d’un pays pour l’approche anglo-saxonne versus l’approche de contrôle direct pour la gouvernance. En cohérence avec cet argument, nous trouvons que l’effet de la culture sur la gouvernance d’entreprise varie selon les entreprises avec des besoins différents concernant l’expertise managériale et la certitude du contrôle. Nous trouvons aussi que la culture interagit avec d’autres facteurs pour déterminer la gouvernance au niveau de l’entreprise.

Resumen

Es bien sabido que las prácticas de gobernanza corporativa a nivel de la empresa varían principalmente entre países y no dentro de ellos, pero factores a nivel nacional como las instituciones legales y financieras explican menos del 50% de las variaciones entre países. En este artículo mostramos que dos dimensiones de cultural nacional – el individualismo y la evitación de la incertidumbre – capturan cerca del 90% de los efectos fijos del país y superan a las variables explicativas a nivel país usadas en la literatura anterior. Argumentamos que la cultura funciona a través de compensar entre la experiencia gerencial y la certidumbre de control, una compensación en buena medida desatendida en la literatura anterior, que captura la preferencia de un país por el enfoque Anglosajón versus el enfoque de control directo de gobernanza. En concordancia con este argumento, encontramos que el efecto de cultura en la gobernanza corporativa varía entre empresas con diferentes necesidades por experiencia gerencia y certeza de control. Encontramos también que la cultura interactúa con otros factores para determinar la gobernanza a nivel de empresa.

Resumo

É sabido que as práticas de governança corporativa em nível de empresa variam principalmente entre países e não tanto dentro de países, mas fatores em nível de país, como instituições jurídicas e financeiras, explicam menos de 50% dessa variação entre países. Neste artigo, mostramos que duas dimensões da cultura nacional – individualismo e esquiva da incerteza – capturam cerca de 90% dos efeitos fixos do país e superam as variáveis explicativas em nível de país utilizadas na literatura existente. Argumentamos que a cultura funciona por meio de uma troca entre expertise gerencial e certeza de controle, uma troca largamente negligenciada pela literatura existente, que captura a preferência de um país pela abordagem anglo-saxônica versus a abordagem de controle direto para governança. Em consonância com esse argumento, verificamos que o efeito da cultura sobre a governança corporativa varia de empresa para empresa com diferentes requisitos de conhecimento gerencial e certeza de controle. Também concluímos que a cultura interage com outros fatores para determinar a governança em nível de empresa.

概要

众所周知,公司层面的公司治理实践主要是在国家之间而不是在国家内部有不同,但国家层面的因素,如法律和金融制度对这种跨国变异的解释小于50%。在这篇文章中,我们表明,国家文化的两个维度 – 个人主义和不确定性规避 – 捕捉到国家固定效应约90%,并超越以前文献中使用的国家层面的解释变量。我们认为,文化通过管理专长和控制确定性之间的权衡起作用,这个权衡大多被现有的文献所忽略,而且文化捕捉国家对盎格鲁 - 撒克逊模式对比直接控制治理模式的偏好。与此论点一致,我们发现,文化对公司治理的影响随公司对管理专长和控制确定性的不同的需要而变化。我们还发现,文化与其它因素互动来确定公司层面的治理。

Appendix I: Variable Definitions

Variables	Definition	Source
Corporate governance ratings
CGEng	Index measuring the overall quality of a firm’s governance	GMI
CGEng GAP	The difference between a foreign firm’s CGEng and its matching US firm’s CGEng	As above
DCG	Calculated by subtracting from a firm’s CGEng the lowest rating in the country year scaled by [48 minus the lowest CG rating in the country year]	As above
Country-level variables
IDV	The index of individualism	Hofstede (2001)
UAI	The index of uncertainty avoidance	As above
PDI	The index of power distance	As above
MAS	The index of masculinity	As above
EMBEDDED	The index of embeddedness	Schwartz (1994)
IDV_71	Updated individualism index among respondents that were born after 1958	Beugelsdijk et al. (2015)
UAI_71	Updated uncertainty avoidance index among respondents that were born after 1958	As above
IDV_GDP_UPDATED	Updated individualism index with the average GDP per capita between 2006 and 2011	Tang and Koveos (2008)
UAI_GDP_UPDATED	Updated uncertainty avoidance index with the average GDP per capita between 2006 and 2011	As above
POL. RIGHTS	The average of the scores on political rights across 2006–2011	Freedom House
LEGAL	The multiplication of a country’s anti-self-dealing index and rule of law	Djankov et al. (2008), WGI
CREDITOR RIGHTS	Creditor protection index	Djankov et al. (2007)
MKT CAP/GDP	The ratio of a country’s stock market capitalization to GDP	World Bank
GDP PC	The logarithm of a country’s GDP per capita	As above
TRUST	The percentage of a country’s respondents that believe people in the country are generally trustworthy	World Values Survey
PROTESTANT%	% of a country’s population that claim to be Protestant	McCleary and Barro (2006)
CATHOLIC%	% of a country’s population that claim to be Catholic or Orthodox	As above
MUSLIM%	% of a country’s population that claim to be Muslim	As above
NONREL%	% of a country’s population that claim to be atheist	As above
Firm-level variables
SIZE	The logarithm of total assets in millions of US dollars (in 2011 dollars)	Worldscope
DEBT/ASSETS	Total liabilities divided by total assets	As above
CASH/ASSETS	The ratio of liquid assets to total assets	As above
SALES GROWTH	The annual growth of net sales averaged over the past three years	As above
CLOSELY HELD	The percentage of shares held by corporate insiders and blockholders with more than 5% ownership	As above
EXTERNAL FINANCE	The US industry (based on three-digit SIC codes) median of need for external financing defined as capital expenditures minus cash flows from operations divided by capital expenditures	As above
FOREIGN SALES	The portion of a firm’s net sales that comes from overseas	As above
ADR	A dummy variable that takes a value of one if a firm is listed on a major US exchange either directly or through Level II or III American Depositary Receipts (ADRs), and zero otherwise	As above
Q GAP	The difference between a foreign firm’s Tobin’s Q and its matching US firm’s Tobin’s Q	As above
PPE/ASSETS	The ratio of property, plant, and equipment to assets	As above
CAPX/ASSETS	The ratio of capital expenditure to assets	As above
RD/ASSETS	The ratio of R&D expenses to assets	As above
MARKET SHARE	A firm’s sales market share in the industry (defined by the first three SIC digits) in a country year	As above
MATURITY	The ratio of retained earnings to common equity	As above
Instrumental variables
PRONOUN1,2,6	The share of a country’s population that speaks a language belonging to each category of pronominal expression	Davis and Abdurazokzoda (2016)
POLITENESS	The share of a country’s population that speaks a language exhibiting multiple politeness distinctions	As above