Academic journal article Multinational Business Review

Multinationality as a Moderator of National Institutions: The Case of Culture and Capital Structure Decisions

Academic journal article Multinational Business Review

Multinationality as a Moderator of National Institutions: The Case of Culture and Capital Structure Decisions

Article excerpt

Abstract:

Literature in international business and finance share the belief that country-level institutions affect the decisions of corporations. In this study, we highlight the other side of the picture and propose that MNCs can moderate the impact of the national institutions of a country. Unlike previous studies, we treat culture not only as an explanatory variable but also as a moderator. We posit that multinationality moderates the influence of national culture on corporate financial leverage. Using a large panel data set of 50 countries, we show that the multinationality of a firm decreases the impact that national culture has on its capital structure. Additionally, our study makes another significant contribution by establishing existing cultural dimensions as economically and statistically significant determinants of capital structure.

INTRODUCTION

Ever since La Porta, Lopes, Shleifer, and Vishny (1997, 1998) introduced the concept of legal origin and its importance on investor protection, an increasing number of financial economists have turned their attention to the systematic differences between institutions across countries. Many institutional factors such as the development of the financial sector, GDP per capita, corruption, inflation, tax levels, and others have been shown to influence crosscountry debt ratios (e.g., Booth, Aivazian, Demirguc-Kunt, and Maksimovic 2001).

Ironically, the institution that has received the most attention in international business literature (national culture) has largely been ignored in the finance literature. Since the publication of Hofstede's (1980) Culture Consequences, there have been a large number of journal articles across several business disciplines that seek to improve our understanding of how culture affects business decisions.

Previous studies have focused their attention on how national institutions affect the behavior of corporations. In this study, we explore how the presence of MNCs can moderate the influence of national institutions. In particular, we are interested in knowing whether the multinationality of a firm mitigates the impact that local culture has on its capital structure.

We suggest that the presence of multinational corporations brings change to the countries where they operate. MNCs have been at the center of a management standardization process across the globe while at the same time providing access to resources that otherwise may not have been available in those countries, thus homogenizing domestic and international conditions.

To illustrate how our paper fits within the existing literature on capital structure, we have prepared Figure 1. We separate the determinants of capital structure into two levels, country-specific and firm-specific, represented by the dotted-line boxes. Country-specific determinants include wealth, relative size of the stock market, legal systems, among others. These effects are represented by Box El. Firm-specific determinants of debt ratios include growth opportunities, size, and non-debt tax shields. These effects are represented in Box E2. Multinationality is a firm-specific decision and one of our main variables. The effects of multinationality on capital structure are represented by E3. Our hypotheses are represented by the lines HIa, HIb, H2a, and H2b. They include two country-specific variables: 1) Hofstede's uncertainty avoidance and individualism and 2) their interaction with multinationality.

We test our hypotheses using a large panel data set (1996-2004), which is comprised of 50 countries with more than 80,000 firm-year observations each. We use two cultural dimensions from Hofstede (1980) and House et al. (2004) as proxies for culture. We use foreign sales (a percentage of total sales) as the proxy for multinationality. We use the interaction of these variables to assess how multinationality weakens the influence of national culture on corporate capital structures. …

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