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How does culture influence corporate risk-taking?

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  • Li, Kai
  • Griffin, Dale
  • Yue, Heng
  • Zhao, Longkai

Abstract

We investigate the role of national culture in corporate risk-taking. We postulate that culture influences corporate risk-taking both through its effect on managerial decision-making and through its effect on a country's formal institutions. Further, we postulate that the influence of culture is conditioned on the extent of managerial discretion as measured by earnings discretion and firm size. Using firm-level data from 35 countries and employing a hierarchical linear modeling approach to isolate the effects of firm-level and country-level variables, we show that individualism has a positive and significant association, whereas uncertainty avoidance and harmony have negative and significant associations, with corporate risk-taking. Greater earnings discretion strengthens and larger firm size weakens the association of culture with corporate risk-taking. We conclude that even in a highly globalized world with sophisticated managers, culture matters.

Suggested Citation

  • Li, Kai & Griffin, Dale & Yue, Heng & Zhao, Longkai, 2013. "How does culture influence corporate risk-taking?," Journal of Corporate Finance, Elsevier, vol. 23(C), pages 1-22.
    • Handle: RePEc:eee:corfin:v:23:y:2013:i:c:p:1-22
    DOI: 10.1016/j.jcorpfin.2013.07.008
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    More about this item

    Keywords

    Formal institutions; Harmony; Individualism; National culture; Corporate risk-taking; Uncertainty avoidance;
    All these keywords.

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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