The Determinants of Corporate Capital Structure: Do CEO’s Cultural Values Affect the Firm Leverage Decision?

Abstract

We explore the role of national culture of a Chief Executive Officer (CEO) in firms’ financing decision, enacted via the tripartite interaction between values, attitudes and behavior. Values are the cultural core that determines attitudes, ultimately steering the behavior of CEOs. Our research is novel as we go beyond the previous focus on firm nationality and examine the influence of cultural values of the individual CEO in the decision making process. By studying CEO and firm level data from 365 major companies in the USA from 2000 to 2015, we find that the CEOs’ cultural values of mastery and embeddedness, have a significant positive impact on firm incremental debt. Our results remain robust to alternative specifications and endogeneity concerns. Using a quantile panel regression approach we allow for the asymmetries between cultural values and leverage and explore the heterogeneous influence cultural values on the leverage decision. We find that the role of cultural values on borrowing is more economically significant at the two extreme levels of the gearing spectrum. Finally using a sample of Non US CEO’s we also show that cultural values are portable and contextual We conclude that cultural values contribute to the behavioral biases of CEOs which could lead to sub-optimal leverage decisions.