The impact of national culture on overinvestment

Abstract

The purpose of this paper is to explore the link between national culture and investment efficiency through a cross-country study. Based on a sample of 3,216 firms operating in 23 countries and observed over the 2009-2018 period, the study uses national culture Hofstede dimensions and overinvestment as operationalised in Biddle et al. (2009) model. To this end, a logit model and a GMM regression are applied. The results indicate that individualism and masculinity dimensions reinforce the likelihood that managers overinvest and tend to increase overinvestment levels since people from these cultures are known by their individual and money-oriented aspirations. However, managers from power distance cultures and high uncertainty avoidance engage less in overinvestment. This study provides additional cross-country factors that explain overinvestment not determined by agency theory. Manager's investment decisions are not only perceived through an objective financial perspective but also through beliefs and perceptions which are inherited from a manager's culture.