Does Culture Influence Corporate Risk Taking?

Abstract

In this era of globalization and homogenization, does culture still play a role in predicting corporate risk-taking behavior? And if so, how exactly does culture impact corporate decisions? Are there certain aspects of a culture that are more infl uential than others in terms of shaping corporate risk taking? Does culture directly infl uence corporate strategies or does it have more of an indirect affect? Moreover, does the impact of culture vary across corporations and do fi rm characteristics matter? Scholars in a variety disciplines have been debating these questions for years. Some scholars discount the importance of culture in understanding corporate behavior. For instance, some economists argue that corporate decisions should be explained by profi t maximization arguments rather than by intangible factors like culture. However, others believe context does matter and that culture affects corporate behavior, including risk taking. If this is the case, then it is natural to ask whether cultural impact is direct or indirect. In other words, does the cultural impact on the formation of national institutions matter more than the impact culture has on managerial attitudes in terms of predicting corporate risk-taking behavior? Previous empirical research has been inconclusive about the question of whether cultural characteristics directly or indirectly shape corporate risk taking. Departing from prior research, Kai Li and Dale Griffi n (University of British Columbia) and Heng Yue and Longkai Zhao (Peking University) examined both the direct and indirect ways in which culture can infl uence corporate risk taking. On the indirect side, Li and his colleagues examine whether a country’s formal institutions—which are shaped by cultural factors—affect corporate risk taking. Cultural values such as individualism and uncertainty avoidance may lead to different legal frameworks as well as different laws concerning investor protection and creditor rights, which in turn may affect corporate risk taking. For example, more individualistic countries have legal systems that promote individual freedom and autonomy, which may encourage corporate risk taking via legislation that protects the shareholder and creditor rights. The opposite could be true in countries that have higher levels of uncertainty avoidance and are more harmonious. In these countries, less corporate risk taking may occur because of legal proscriptions that discourage such behavior. On the indirect side, Li and his colleagues also examined how these cultural values (individualism, uncertainty avoidance, and harmony) can shape managerial attitudes toward risk taking. Individualistic managers may be more likely to take risks to distinguish themselves from other managers while underestimating the risks that they face. Managers who have low uncertainty avoidance and low harmony should also be comfortable with change, confl ict, and making risky decisions. In contrast, managers in countries with high uncertainty avoidance and more harmony may be very uncomfortable with making risky decisions. Finally, corporate factors may also come into play. Li and his colleagues suggest that culture will have more of an impact when managers have more discretion. And discretion tends to be greater in smaller fi rms. Consequently, managers in smaller fi rms should be more likely to engage in riskier behavior compared to their counterparts in larger fi rms (which typically have more management control systems in place that act to constrain managerial behavior).