The Determination of Capital Structure: Is National Culture a Missing Piece to the Puzzle?
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Determination Is
National
of
Structure:
Capital
Culture
Missing
a
to
the
Piece
Puzzle? Andy C.W. Chui*
HONGKONGPOLYTECHNIC UNIVERSITY
Alison E. Lloyd**
HONGKONGPOLYTECHNIC UNIVERSITY
Chuck C. Y. Kwok*** OFSOUTHCAROLINA UNIVERSITY
Why does knowing the nationality of the company help predict its financial leverage? Differences in institutional backgrounds provide only a partial answer to this question. This study suggests that national culture affects corporate capital structures. Empirical hypotheses, drawn from financial models and .cross-cultural psychology, are tested against a sample of 5591
firms across 22 countries. Results show that countries with high scores on the cultural dimensions of "conservatism"and "mastery"tend to have lower corporate debt ratios. The effects are strong and remain significant even after accountingfor differences in economic performance, legal systems, financial institutions, and some other wellknown determinants of debt ratios.
apital structureis a topic that has received much attention in the financial managementarena. However,
despite the extensive body of literature surrounding the question of an optimal capital structure and the numerous at-
*Andy Chui is Assistant Professor of the Departmentof Business Studies at the Hong Kong Polytechic University. **Alison Lloyd is a doctoral candidate of the Department of Business Studies at the Hong Kong Polytechic University. ***ChuckKwok is Professor of InternationalBusiness at the University of South Carolina.He was Vice President-Administrationof the Academy of InternationalBusiness in 1995-96. The authors would like to thank the helpful comments of three anonymous referees, Tatiana Kostova and the seminar participants at the Academy of InternationalBusiness 2000 Annual Conference. Andy Chui would like to thank the financial support from the Hong Kong Polytechnic University, and Chuck C.Y.Kwok gratefullyacknowledges the support of the Centerfor InternationalBusiness Education and Research (CIBER)at the University of South Carolinafor this research project. JOURNAL OF INTERNATIONALBUSINESS STUDIES, 33, 1 (FIRST QUARTER2002): 99-127
99
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NATIONAL CULTUREAND CAPITAL STRUCTrRE
tempts to explain capital structure determinants, efforts have proved to be inconclusive (Harrisand Raviv, 1991). Moreover, most of the empirical studies on the determinants of capital structure have been based on firms in the United States. Little is known about what causes the capital structure to be different in other countries. Aggarwal (1981) analyzes 500 largest European firms and concludes that country factor is an important determinant of capital structure. However, Kester (1986) finds that only firms in the mature, capital intensive industries in Japan are using more debts than their counterpartin the U.S. Sekely and Collins (1988), on the other hand, provide evidences on the differ
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