The effect of national culture on financial distress prediction modelling: evidence from European countries

Abstract

Financial distress prediction models developed by researchers in different countries differ significantly from each other with respect to the variables used and the coefficients estimated. Therefore, the use of country-specific models in international analysis across countries is questionable. National culture is an important factor behind the differences in the estimated models. The objective of this study is to investigate how national culture, in terms of Hofstede's cultural dimensions, affects the coefficients of country-specific models. A set of six financial variables is selected on theoretical grounds, and a financial distress prediction model is estimated by the logistic regression analysis for a group of European countries, separately for each country. The data include financial variables of 3,372,493 non-failed and 56,541 failed firm observations from 30 European countries. Then, the impact of cultural dimensions on the coefficients of the models is assessed by correlation and regression analyses. The findings show that the individualism vs. collectivism dimension has a strong effect on many of the coefficients. However, the coefficient of the equity ratio is not sensitive to cultural differences, and is therefore is a useful variable in models developed for international comparisons.