Abstract
This paper investigates the effects of national culture on firm risk-taking, using a comprehensive dataset covering 50,000 firms in 400 industries in 51 countries. Risk-taking is found to be higher for domestic firms in countries with low uncertainty aversion, low tolerance for hierarchical relationships, and high individualism. Domestic firms in such countries tend to take substantially more risk in industries which are more informationally opaque (e.g., finance, mining, oil refinery, IT). Risk-taking by foreign firms is best explained by the cultural norms of their country of origin. These results hold even after controlling for legal constraints, insurance safety nets, and economic development.
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Notes
In general, commodity industries (biofuels, metal products, non-ferrous metals) are riskier and more opaque than other industries because they adopt more complicated production methods and organization structures and incur more intensive R&D expenditures which may cost more than the end benefits (Huang 2008).
117,000 IBM local employees of marketing and customer service positions from 66 countries around the world.
The “comparative management” literature argues in favor of the “convergence hypothesis,” which implies that management philosophies and practices around the world would eventually become more and more alike as societies tend to become more exposed to the same products and ideas (see Kerr et al. 1960; Lomax and Berkowitz 1972).
Accordingly, the United States is excluded from cross-country regressions.
Setting all outliers to a specified percentile of the data.
Japan is a highly uncertainty averse country, whereas the USA scores low in uncertainty aversion.
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Acknowledgments
I have benefited especially from detailed discussions with Stijn Claessens and Luc Laeven. I am grateful to Mohsan Bilal for his extensive help with the data. I would like to thank George Akerlof, Christopher Baum, John Beshears, Nathan Nunn, Lev Ratnovski, Fabian Valencia, and Francis Vitek in particular, and participants in the 17th International Conference on Cultural Economics for their interesting comments on the topic, and useful and valuable suggestions on this paper. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. This paper is the winner of the President Prize for the best graduate student paper presented at the ACEI’s 17th International Conference on Cultural Economics in Kyoto, Japan.
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Appendices
Appendix 1: Data sources and definitions
Variable | Description | Sources |
|---|---|---|
Country-specific data | ||
Uncertainty aversion | Uncertainty aversion indicator—UAI. Higher values reflect higher national uncertainty aversion | Hofstede (2001) |
Individualism | Individualism indicator—IDV. Higher values reflect higher national individualism | Hofstede (2001) |
Power distance | Power distance—PDI. Higher values reflect higher national power distance | Hofstede (2001) |
Masculinity | Masculinity—MAS. Higher values reflect higher national masculinity | Hofstede (2001) |
Religion | Religion | Shackman (2009) |
Legal origin | Legal origin variable separating countries into: French, German, Scandinavian, Socialist, and British legal origin | Glaeser and Shleifer (2002) |
Rule of law | Captures perceptions of the extent to which agents have confidence in and abide by the rules of society, and in particular the quality of contract enforcement, property rights, the police, and the courts, as well as the likelihood of crime and violence | Worldwide Governance Indicators, World Bank |
Control of corruption | Captures perceptions of the extent to which public power is exercised for private gain, including both petty and grand forms of corruption, as well as “capture” of the state by elites and private interests | Worldwide Governance Indicators, World Bank |
Corruption | Alternative measure of the corruption level | Transparency International |
Regulatory quality | Captures perceptions of the ability of the government to formulate and implement sound policies and regulations that permit and promote private sector development | Worldwide Governance Indicators, World Bank |
Government effectiveness | Captures perceptions of the quality of public services, the quality of the civil service and the degree of its independence from political pressures, the quality of policy formulation and implementation, and the credibility of the government’s commitment to such policies | Worldwide Governance Indicators, World Bank |
Voice and accountability | Reflects perceptions of the extent to which a country’s citizens are able to participate in selecting their government, as well as freedom of expression, freedom of association, and a free media | Worldwide Governance Indicators, World Bank |
Political stability | Captures perceptions of the likelihood that the government will be destabilized or overthrown by unconstitutional or violent means, including politically motivated violence and terrorism | Worldwide Governance Indicators, World Bank |
Formal institution index | Index of quality of formal institutions, calculated by the formula: Formal institutions = [rule of law × 0.4248 + government effectiveness × 0.4198 + control of corruption × 0.4187 + regulatory quality × 0.4093 + political stability × 0.3954 + accountability × 0.3797] | Li and Zahra (2012); Author’s calculations |
Creditor rights | An index aggregating creditor rights, following La Porta et al. (1997, 1998). The index ranges from 0 (weak creditor rights) to 4 (strong creditor rights) | |
Property rights | Index of property rights in 2004 | The Heritage Foundation, http://www.heritage.org/Index/ |
Legal protect. of minority shareholders (shareholder rights) | An index measuring the legal protection of minority shareholders against expropriation by corporate insiders. Named the anti-self-dealing index in Djankov et al. (2008) | Djankov et al. (2008) |
Disclosure requirements index | ||
Efficiency of debt enforcement | Variable “Case A Efficiency” | Djankov et al. (2008) |
Enforceability of contracts | Index measuring enforceability of contracts | Djankov et al. (2008) |
Bankruptcy costs | Assessment of the efficiency of bankruptcy law. Scale from 0 to 6, where higher scores indicate higher compliance | Worldwide Governance Indicators, World Bank |
Propensity to file for bankruptcy | Index calculated as the inverse of bankruptcy costs | Author’s calculations |
Economic development | GDP per capita | International Finance Statistics |
Industry-level data | ||
SIC Classification | 2, 3, and 4 letter standard industrial classification | US Department of Labor |
Stock price informativeness | 1-R2 of regressing firm’s returns on industry-specific returns and market-specific returns simultaneously | Author’s calculations |
Industry opacity | ln (1- R2/R2) | Author’s calculations |
Industry diversification | Index that measures the diversity of industrial activities | Author’s calculations |
Industry concentration | Herfindahl index which measures the amount of competition among firms within an industry | Author’s calculations |
Industry competition | The inverse of industry concentration | Author’s calculations |
Concentration in highly opaque industries | Herfindahl index which measures the amount of competition among firms within opaque industries (industries whose informational opacity is higher than 3.5) | Author’s calculations |
Concentration in less opaque industries | Herfindahl index which measures the amount of competition among firms in less opaque industries (industries whose informational opacity is lower than 3.5) | Author’s calculations |
Firm-level data | ||
All firm-level data | All firm-level data | CVU Database constructed by the Macro-Finance Research Unit at the IMF (original data from Datastream, Worldscope, Bankscope) |
Z-score | (Return on assets + capital-asset ratio)/standard deviation of return on assets | Author’s calculations |
z-score | ln(Z-score) | Author’s calculations |
σ (ROA) | Standard deviation of return on assets | Author’s calculations |
R&D expenditures | Expenditures on research and development divided by total firm market share | CVU |
Firm size | Log of total assets, where total assets is the sum of fixes and current assets | CVU |
Firm leverage | Leverage, which is defined as the ratio of total liabilities (current and noncurrent liabilities) to total assets | CVU |
Profitability | Profitability, measured as the firm’s return on assets (ROA) and calculated as the ratio of earnings (EBIT) to total assets | CVU |
Sales growth | Sales growth, calculated as the annual logarithmic growth of sales | CVU |
Dependence on external finance | Dependence on external finance, proxied by the Rajan–Zingales index (Rajan and Zingales 1998) | CVU |
Appendix 2: Summary statistics tables
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Mihet, R. Effects of culture on firm risk-taking: a cross-country and cross-industry analysis. J Cult Econ 37, 109–151 (2013). https://doi.org/10.1007/s10824-012-9186-2
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DOI: https://doi.org/10.1007/s10824-012-9186-2