Culture, Capital Structure and Implications for Accounting Regulation

• In Event: Concurrent Session 4.4: IFRS, Culture, and Transfer Pricing

Abstract

We examine culture as a determinant of capital structure. Our motivation is to contribute to two branches of literature that are currently replete with mixed results. First is the literature on the determinants of capital structure. Second is that on accounting policy initiatives aimed at mitigating information asymmetry to enhance market efficiency globally. Our measure for capital structure is leverage, the debt to assets ratio. Using Hofstede’s dimensions of national culture, we compute SECRECY, a measure of secretiveness shown to be associated with information asymmetry and risk aversion. The sample comprises 284,158 firm years from 47 countries over the fiscal years 1990 through 2009. We find that leverage is positively associated with SECRECY, consistent with the behavior of managers and investors under information asymmetry and risk aversion. Our analysis also reveals a conflict of disclosure interests between the firm and lenders, especially in secretive cultures as follows: First, the propensity of firms to adopt high quality accounting standards is positively associated with leverage, but negatively associated with SECRECY and the interaction between SECRECY and leverage. Second, book-to-market ratio, a measure of asymmetric timeliness, is positively associated with SECRECY, but negatively associated with leverage. We discuss the implications.

Keywords: Culture; SECRECY; Secretiveness; Capital Structure; Leverage; Debt; Equity; cluster-robust; GAAP.

Authors

• Andrew Ayimbila Anabila, The University of Texas–Pan American

• Eunyoung Whang, The University of Texas–Pan American