CULTURAL DETERMINANTS OF CAPITAL STRUCTURE

Abstract

This study proposes that culture, as measured by Hofstede’s four dimensions, is an important explanatory variable in capital structure decisions through its influence on managerial values and sensemaking. Specifically, power distance, collectivism, masculinity and uncertainty acceptance are all expected to be negatively related to leverage. Using a two?step regression procedure to control for firm?level characteristics, as well as known country?level factors, the results support the above proposition regarding culture’s explanatory power. Further robustness tests using principal components analysis and Schwartz’s two dimensions also yield similar findings