New Evidence on National Culture and Corporate Financing: Does Institutional Quality Matter?

Abstract

The purpose of this paper is twofold. First, to examine the dynamic impact of national culture on corporate financing in the context of seven Asian countries using a two-step GMM model, and second, to assess the moderating role of institutional quality on the relationship between culture and corporate financing. To achieve these objectives, a unique sample of seven Asian countries from the period of 2002 to 2018 was employed. The empirical results reveal that firms operating in countries that encourage individualism, masculinity, and uncertainty avoidance tend to use higher leverage in their operations. Individualism encourages autonomy in decision making and managers from such cultures engage in more risky decisions, while masculinity focuses on competition and suggests that males have a higher tendency for risk preference than females when undertaking financial decisions. In addition, firms from high uncertainty avoidance societies are more driven to engage in the use of leverage to obtain benefits via tax saving, whereas firms in higher power distance countries are less reliant on leverage. Our findings are consistent with our expectations, as well as supporting the existing literature on the issue. Further, the positive culture–leverage nexus is significantly and positively moderated by institutional quality. The findings are robust to alternative procedures (i.e., alternative proxies for culture and corporate financing, reduced sample size, and alternative estimation model), contribute to the existing literature, and have implications for potential policymakers.