The Principal, the Agent, and the Culture: Potential Impacts of Culture on Financing Contracts

• In Event: Cases and International Accounting

Abstract

ABSTRACT: Agency theory assumes that principals will minimize the uncertainties and risks that are associated with agents (the agency problem) before engaging in contracts with agents. Agency theory makes these assumptions without regard to the differences in how societal values influence principal and agent behaviors in different cultures. In a related context, the literature suggests that culture influences the accounting values of secrecy and conservatism as well as bank lending behavior, which in turn impact borrower access to financing. Accordingly, we review the literature on agency theory along with national cultures and accounting values and suggest how culture may impact agency theory, relying on principal-agent financing contracts to support our arguments. In particular, we propose that high individualism, low uncertainty avoidance and low power distance cultural dimensions will positively moderate the relationship between borrower information disclosures and borrower access to financing. In addition, we propose that high individualism, low uncertainty avoidance and low power distance cultural dimensions will weaken the assumptions of agency theory with regards to financing contracts. In other words, in high individualism, low uncertainty avoidance and low power distance cultures it is easier for borrowers to access financing because contrary to agency theory, principals take more risks in financing contracts. Finally, we propose areas in which the propositions highlighted in this paper can be applied to address borrower financing issues in different cultures.

Authors

• Enoch Kusi Asare, University of Dallas

• Sri Beldona, The Univeristy of Dallas