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Retrospective wisdom: Long-term orientation and the rating downgrades of financial institutions

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Abstract

This study examines the effects of Hofstede’s long-term orientation (LTO) on the rating changes of financial institutions (FIs) in 50 countries. The impacts of LTO on rating downgrades are stronger for the sample of speculative grade-rated FIs and more pronounced for crises sample. The significance effect of LTO on downgrades is robust to various tests and is unlikely due to endogeneity. Switching from a short term- to a long term (LT)-oriented culture lowers the downgrade risk of an FI by 47%, a speculative-grade rated FI by 56%, and an FI of a country in crisis by 58%. LT-oriented societies promote responsible borrowing and a good payment culture. A strong preference for long-term business survival motivates banks in LToriented nations to maintain a more prudent bank credit to bank deposits ratio, particularly during crises. Incorporating LTO in banking regulations may encourage banks to adopt longterm perspectives and finance long-term sustainable projects.

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  • Huong Dieu Dang, 2023. "Retrospective wisdom: Long-term orientation and the rating downgrades of financial institutions," Working Papers in Economics 23/06, University of Canterbury, Department of Economics and Finance.
    • Handle: RePEc:cbt:econwp:23/06
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    File URL: https://repec.canterbury.ac.nz/cbt/econwp/2306.pdf
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    Keywords

    Long-term orientation; National culture; Hofstede; World Value Survey; Rating downgrades;
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    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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