The Effect of National Culture on Corporate Financial Decisions

Abstract

Recently, studies on the effects of cultural factors on corporate financial decision-making have emerged in the finance literature. Culture shapes behaviors of people and distinguishes members of one group or category from another. The decision-making process depends greatly on cultural background. Executives’ financial decisions show variance from society to society as a result of their cultural differences. The objective of this study is to point out the effects of national culture on financial decision-making. We examined Hofstede’s cultural dimensions among 20 countries around the world to explain the variation of financial decisions based on cultural differences. According to our results, power-distance has an effect on all financial decisions included in the study, except for the capital structure. Individualism also has an influence on all the financial decisions we analyzed, except for Research & Development (R&D) expenditures. Uncertainty avoidance is found to have an effect on all of the financial decision parameters included here, except for discretionary accruals, which are an indication of a firm’s earnings-management decisions and can be considered as a clue for manipulation of earnings. Masculinity is found to have an effect only on capital structure and working capital level.