National culture and leverage adjustments

Abstract

Purpose

The purpose of this paper is to explore the impact of national culture on leverage speed of adjustment (SOA) across countries.

Design/methodology/approach

We use a partial adjustment model to estimate the impact of national culture (assessed using Hofstede's six cultural dimensions) on leverage SOA.

Findings

We find that culture does significantly affect the degree to which firms deviate from target debt level and the speed of adjustment (SOA) of leverage. High power distance, individualism and masculinity are associated with a slower SOA, while high long-term orientation, uncertainty avoidance and indulgence result in a faster SOA. Additionally, cultural characteristics affect leverage SOA differently when firms are underlevered versus overlevered and when firms have small versus large deviations from the target level of debt. We suggest that these effects can be explained by agency motives.

Research limitations/implications

The results of the study are based on available information for firms from 53 countries.

Originality/value

This study is, to the best of our knowledge, the first to examine the impact of national cultural traits on leverage SOA in international settings.

Citation

Orlova, S. and Harper, G. (2022), "National culture and leverage adjustments", Review of Behavioral Finance, Vol. 14 No. 3, pp. 410-435. https://doi.org/10.1108/RBF-09-2020-0229