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National culture and capital structure decisions: Evidence from foreign joint ventures in China

Author

Listed:
  • Kai Li

    (Sauder School of Business, University of British Columbia, Vancouver, Canada)

  • Dale Griffin

    (Sauder School of Business, University of British Columbia, Vancouver, Canada)

  • Heng Yue

    (Guanghua School of Management, Peking University, Beijing, P.R. China)

  • Longkai Zhao

    (Guanghua School of Management, Peking University, Beijing, P.R. China)

Abstract

We investigate the role of firms’ country of origin in financial leverage decisions. Foreign joint ventures in China face a common set of country-level formal institutional constraints, but vary in the cultural values they bring from their countries of origin. We hypothesize that national culture enters the joint optimization process, leading to foreign joint ventures’ leverage decisions, and that it affects leverage decisions both directly and indirectly. Employing a hierarchical linear model distinguishing firm-level from country-level variables, and a data set covering over 8000 foreign joint ventures in China from 32 different countries and regions in the year 2002, we find that mastery has negative and significant direct effects on foreign joint ventures’ leverage and short-term debt decisions, and a positive and significant direct effect on the likelihood of foreign joint ventures having long-term debt. The indirect effects of mastery on leverage decisions sometimes reinforce and sometimes offset the direct effects. Embeddedness has no significant direct effect on foreign joint ventures’ leverage decisions, but exerts its influence entirely through indirect effects. Finally, the economic significance analysis of the total effects suggests that national culture has significant explanatory power in the leverage decisions of foreign joint ventures in China.

Suggested Citation

  • Kai Li & Dale Griffin & Heng Yue & Longkai Zhao, 2011. "National culture and capital structure decisions: Evidence from foreign joint ventures in China," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 42(4), pages 477-503, May.
  • Handle: RePEc:pal:jintbs:v:42:y:2011:i:4:p:477-503
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    Citations

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    Cited by:

    1. Xunan Feng & Anders C. Johansson, 2017. "CEO Incentives in Chinese State-Controlled Firms," Economic Development and Cultural Change, University of Chicago Press, vol. 65(2), pages 223-264.
    2. repec:bof:bofrdp:urn:nbn:fi:bof-201508181353 is not listed on IDEAS
    3. Manthos D. Delis & Chrysovalantis Gaganis & Iftekhar Hasan & Fotios Pasiouras, 2017. "The Effect of Board Directors from Countries with Different Genetic Diversity Levels on Corporate Performance," Management Science, INFORMS, vol. 63(1), pages 231-249, January.
    4. Irene Wei Kiong Ting & Hooi Hooi Lean & Qian Long Kweh & Noor Azlinna Azizan, 2016. "Managerial overconfidence, government intervention and corporate financing decision," International Journal of Managerial Finance, Emerald Group Publishing, vol. 12(1), pages 4-24, February.
    5. Boubakri, Narjess & Saffar, Walid, 2016. "Culture and externally financed firm growth," Journal of Corporate Finance, Elsevier, vol. 41(C), pages 502-520.
    6. repec:bof:bofrdp:urn:nbn:fi:bof-201508181354 is not listed on IDEAS
    7. Gaganis, Chrysovalantis & Hasan, Iftekhar & Pasiouras, Fotios, 2016. "Regulations, institutions and income smoothing by managing technical reserves: International evidence from the insurance industry," Omega, Elsevier, vol. 59(PA), pages 113-129.
    8. repec:eee:finsta:v:29:y:2017:i:c:p:36-56 is not listed on IDEAS
    9. repec:kap:jtecht:v:42:y:2017:i:5:d:10.1007_s10961-016-9474-7 is not listed on IDEAS
    10. Georgieva, Dobrina & Jandik, Tomas & Lee, Wayne Y., 2012. "The impact of laws, regulations, and culture on cross-border joint ventures," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(4), pages 774-795.
    11. Wang, Daphne & Esqueda, Omar A., 2014. "National cultural effects on leverage decisions: Evidence from emerging-market ADRs," Research in International Business and Finance, Elsevier, vol. 31(C), pages 152-177.
    12. Melnyk, Valentyna & Giarratana, Marco & Torres, Anna, 2014. "Marking your trade: Cultural factors in the prolongation of trademarks," Journal of Business Research, Elsevier, vol. 67(4), pages 478-485.
    13. Wang, Danny T. & Gu, Flora F. & Tse, David K. & Yim, Chi Kin (Bennett), 2013. "When does FDI matter? The roles of local institutions and ethnic origins of FDI," International Business Review, Elsevier, vol. 22(2), pages 450-465.
    14. Rothonis, Stephanie & Tran, Duy & Wu, Eliza, 2016. "Does national culture affect the intensity of volatility linkages in international equity markets?," Research in International Business and Finance, Elsevier, vol. 36(C), pages 85-95.
    15. Li, Xibao, 2015. "Specialization, institutions and innovation within China's regional innovation systems," Technological Forecasting and Social Change, Elsevier, vol. 100(C), pages 130-139.
    16. 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.
    17. Chui, Andy C.W. & Kwok, Chuck C.Y. & (Stephen) Zhou, Gaoguang, 2016. "National culture and the cost of debt," Journal of Banking & Finance, Elsevier, vol. 69(C), pages 1-19.
    18. Elnahas, Ahmed M. & Kabir Hassan, M. & Ismail, Ghada M., 2017. "Religion and mergers and acquisitions contracting: The case of earnout agreements," Journal of Corporate Finance, Elsevier, vol. 42(C), pages 221-246.
    19. Lievenbrück, Martin & Schmid, Thomas, 2014. "Why do firms (not) hedge? — Novel evidence on cultural influence," Journal of Corporate Finance, Elsevier, vol. 25(C), pages 92-106.
    20. Eun, Cheol S. & Wang, Lingling & Xiao, Steven C., 2015. "Culture and R2," Journal of Financial Economics, Elsevier, vol. 115(2), pages 283-303.

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