The impact of culture on market timing in capital structure choices

Abstract

This study uses Hofstede's (2001) cultural dimensions to investigate the impact of market reception on capital structure. We examine the interaction of these dimensions with stock returns, our proxy for market timing. Based on our market leverage results, we find evidence that firms do engage in market timing by reducing their leverage ratios when their share prices increase. Furthermore, we find that firms in countries with high uncertainty avoidance and high power distance have lower market leverage ratios and that these cultural dimensions serve to reduce the impact of market timing. These results are consistent for developed markets but mixed for emerging markets. On a book leverage basis, the results are generally consistent but less conclusive. To the extent that culture impacts manager perception of risk and investor reception of newly issued shares, we conclude that cultural dimensions impact the degree to which a firm can modify its capital structure to take advantage of perceived market mispricings.