National Culture and Corporate Investment Efficiency

Abstract

This paper explores whether national culture explains the deviation from the optimal investment, as measured by under- and over-investment compared to the optimal investment level, and the impact of this deviation across cultural dimensions on shareholders’ wealth. Using an international sample of firms listed in 38 countries between 1990 and 2015, we find that assertiveness and gender egalitarianism lead to a greater deviation from the optimal investment whereas institutional and in-group collectivism, as well as future and performance orientation, result in investment policies closer to the optimal investment. Specifically, we find that firms from assertive nations tend to over-invest. In contrast, firms from societies characterized by greater male and female equality, higher institutional and in-group collectivism as well as from societies which reward future performance adopt more conservative investment strategies, and ultimately under-invest. Our results also show that investors are averse to firms which deviate from the optimal investment and they are more sensitive to over-investment than under-investment. Over-investment is valued higher in societies characterized by greater gender equality and future planning but less so in societies that care more about the interest of the collective. To the best of our knowledge, this is the first study exploring the relationship between the national culture and the under- and over-investment policies of a firm and, importantly, whether this deviation affects the wealth of the shareholders. Our results show that national culture plays an essential role in the efficient allocation of investment.