We examine culture as a determinant of capital structure. Our motivation is twofold. First is to contribute to the literature on the determinants of capital structure, which is currently replete with mixed findings. Second is to explore accounting policy implications. Our measure for capital structure is leverage, the debt-to-assets ratio. Using Hofstede's dimensions of culture, we compute SECRECY, a measure of secretiveness shown to be associated with information asymmetry and risk aversion. We use 284,158 firm-years from 46 countries over the fiscal years 1990 through 2009. Our methodology controls for determinants of capital structure identified in prior research and is robust to clustering by years and countries. We find that leverage is positively associated with SECRECY, consistent with the behavior of managers and investors under information asymmetry and risk aversion. We examine the implications of SECRECY and leverage for capital market initiatives, specifically GAAP evolution, whose primary objective is to mitigate information asymmetry. The analysis reveals a conflict of disclosure interests between the firm and lenders, especially in secretive cultures.
All Science Journal Classification (ASJC) codes
- Economics, Econometrics and Finance(all)