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National culture and leverage adjustments

Author

Listed:
  • Svetlana Orlova
  • Grant Harper

Abstract

Purpose - The purpose of this paper is to explore the impact of national culture on leverage speed of adjustment (SOA) across countries. Design/methodology/approach - We use a partial adjustment model to estimate the impact of national culture (assessed using Hofstede's six cultural dimensions) on leverage SOA. Findings - We find that culture does significantly affect the degree to which firms deviate from target debt level and the speed of adjustment (SOA) of leverage. High power distance, individualism and masculinity are associated with a slower SOA, while high long-term orientation, uncertainty avoidance and indulgence result in a faster SOA. Additionally, cultural characteristics affect leverage SOA differently when firms are underlevered versus overlevered and when firms have small versus large deviations from the target level of debt. We suggest that these effects can be explained by agency motives. Research limitations/implications - The results of the study are based on available information for firms from 53 countries. Originality/value - This study is, to the best of our knowledge, the first to examine the impact of national cultural traits on leverage SOA in international settings.

Suggested Citation

  • Svetlana Orlova & Grant Harper, 2021. "National culture and leverage adjustments," Review of Behavioral Finance, Emerald Group Publishing Limited, vol. 14(3), pages 410-435, March.
    • Handle: RePEc:eme:rbfpps:rbf-09-2020-0229
    DOI: 10.1108/RBF-09-2020-0229
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    Citations

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    Cited by:

    1. Yingrun Chen & Yi Zhang, 2023. "Do Regional Cultural Differences Affects the Effect of Accounting Firms’ Merger: Evidence From China," SAGE Open, , vol. 13(2), pages 21582440231, June.

    More about this item

    Keywords

    Culture; Agency costs; Leverage; Speed of adjustment; F3; G3; G4;
    All these keywords.

    JEL classification:

    • F3 - International Economics - - International Finance
    • G3 - Financial Economics - - Corporate Finance and Governance
    • G4 - Financial Economics - - Behavioral Finance

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