Culture, Capital Structure, and Implications for Accounting Regulation

Date01 January 2017
AuthorEunyoung Whang,Andrew A. Anabila
Published date01 January 2017
© 2017 Wiley Periodicals, Inc.
Published online in Wiley Online Library (
DOI 10.1002/jcaf.22250
Culture, Capital Structure,
and Implications for Accounting
Andrew A. Anabila and Eunyoung Whang
We examine the
role of culture in cap-
ital structure choice,
and explore finan-
cial reporting policy
implications. This
study is motivated
by the observation
that the literature to
date shows mixed
and often conflict-
ing findings on the
determinants of capi-
tal structure. There
are many theoretical
expositions on capital
structure, but not as
much complementary
work on the practical
application (Beat-
tie, Goodacre,&
Thomson, 2006;
Margaritis& Psillaki,
2007) and the policy
Financing and
capital structure
border on the life-
blood (funding)
of business enter-
prises and nations’
economies. Culture
is one of the pri-
mary determinants
of nations’ entre-
preneurial (House,
Javidan, Hanges, &
Dorfman, 2002) and
economic develop-
ment (LaPorta,
Lopez- De-Silanes,
Shleifer, & Vishny,
1998, 2001; La Porta,
Lopez-De-Silanes, &
Shleifer, 2006; Porter,
1990), through risk
taking and proac-
tiveness (Kreiser,
Marino, Dickson, &
Weaver, 2010). How-
ever, except for Chui,
Lloyd, and Kwok
(2002), and Fauver
and McDonald
(2015), little is known
about the direct role
of culture in firms’
choice of financing.
The bulk of studies,
including La Porta
We examine culture as a determinant of capital
structure. Our motivation is twofold. First is to
contribute to the literature on the determinants of
capital structure, which is currently replete with
mixed findings. Second is to explore accounting
policy implications. Our measure for capital struc-
ture is leverage, the debt-to-assets ratio. Using
Hofstede’s dimensions of culture, we compute
SECRECY, a measure of secretiveness shown to
be associated with information asymmetry and
risk aversion. We use 284,158 firm-years from
46 countries over the fiscal years 1990 through
2009. Our methodology controls for determinants
of capital structure identified in prior research and
is robust to clustering by years and countries. We
find that leverage is positively associated with
SECRECY, consistent with the behavior of manag-
ers and investors under information asymmetry
and risk aversion. We examine the implications of
SECRECY and leverage for capital market initia-
tives, specifically GAAP evolution, whose primary
objective is to mitigate information asymmetry.
The analysis reveals a conflict of disclosure inter-
ests between the firm and lenders, especially in
secretive cultures. © 2017 Wiley Periodicals, Inc.
Refereed (Double-Blind
Peer Reviewed)
The Journal of Corporate Accounting & Finance / January/February 2017 23
© 2017 Wiley Periodicals, Inc. DOI 10.1002/jcaf
et al. (1998, 2000, 2006) and
Beattie et al. (2006), focus on
the manifestations of culture
via formal legal and economic
institutions. Yet institutions
are only a subset of the parties
involved in financing. We opine
that this ignores other signifi-
cant roles of culture in inves-
tors’ and managers’ choices and
the implications for policy such
as generally accepted account-
ing principles (GAAP).
Our proxy for capital struc-
ture is leverage, the ratio of
debt to assets. We summarize
three dimensions of culture
from Hofstede (1980, 2001)
into a SECRECY ( = Uncer-
tainty Avoidance + Power
Distance – Individualism)
measure following Hope, Kang,
Thomas, and Yoo (2008). Our
primary hypothesis is that
leverage is associated with
SECRECY for two reasons.
First, Hope et al. (2008) show
that SECRECY is associated
with information asymmetry.
For example, they show that
SECRECY is a (negative)
determinant of audit quality,
which, according to Jensen and
Meckling (1976); Palmrose
(1984); Watts and Zimmerman
(1986); Francis and Wilson
(1988); and Craswell, Francis,
and Taylor (1995), reduces
information asymmetries and
agency conflicts between the
firm and its investors. The
pecking order theory of capital
structure posits that informa-
tion asymmetry is associated
with the preference for debt
over equity when firms seek
external capital (Myers, 2001,
p. 93; Myers & Majluf, 1984).
Linking Hope et al. (2008) and
the pecking order theory, we
conjecture that SECRECY is
associated leverage.
Information asymmetry
is also the basis of the agency
theory of capital structure,
which, unlike the pecking order
theory, incorporates agency
problems, which argues that it
is often impossible to perfectly
align managers’ interests with
those of shareholders. Accord-
ing to the theory, firms will pre-
fer debt to equity when seeking
external capital, to mitigate
the agency problems and help
motivate if not discipline man-
agers (Jensen, 1986; Myers,
2001, p. 98; Zwiebel, 1996).
Further, the use of debt enables
firms to transfer value from
lenders through “risk shifting”
(Jensen & Meckling, 1976) or
“underinvestment” (Myers,
1977, 2001) when default risk
is high. Thus, we argue that
debt is more preferable under
information asymmetry and,
for that matter, SECRECY.
This first reason focuses on the
implications of SECRECY for
information asymmetry and the
demand side (managers’ prefer-
ences) of capital markets.
Second, as will be seen in
the next section, SECRECY
is essentially a composite
of culture dimensions, like
“Uncertainty Avoidance,” that
measure inherent aversion to
uncertainty and risk. Therefore,
we expect investors in secretive
cultures, consistent with their
inherent risk aversion, to limit
their exposure to risk by choos-
ing relatively more debt (prior
claims) and less equity (residual
claims). This second reason
focuses on the supply (inves-
tors) side of capital markets,
which is not considered in prior
The culture dimensions that
constitute SECRECY differ
from those used in Chui et al.
(2002) who summarize six cul-
ture value types from Schwartz
(1994) into two dimensions:
conservatism, and mastery
and hierarchy. Our choice is
guided by Shenkar (2001) and
more recently Taras, Rowney,
and Steel (2009), on how to
choose from the many avail-
able culture dimensions. The
next section details the basis of
our choice. Also distinct from
prior studies, we examine the
implications of SECRECY and
capital structure for accounting
policy choice, and timeliness
of recognition using book-to-
market ratios following Ball,
Robin, and Sadka (2008). This
helps to draw inferences from
our study toward enhancing the
efficiency of capital markets.
Further, our methodology is
robust to clustering. We con-
trol for year-, firm-, industry-,
and country-level determinants
of capital structure follow-
ing Kayo and Kimura (2011);
Booth, Aivazian, Demirgüç-
Kunt, and Maksimovic (2001);
Bancel and Mittoo (2004);
Antoniou, Guney, and Paudyal
(2008); Beck, Demirgüç-Kunt,
and Maksimovic (2008); and
De Jong, Kabir, and Nguyen
(2008). Our sample comprises
of 284,158 firm years drawn
from Compustat, over the fiscal
years 1990 through 2009, from
a wide spectrum of cultures
Consistent with our
main hypothesis, we find that
leverage is associated with
SECRECY. Thus, in more
secretive cultures, investors
(supply side of capital) choose
more debt (prior claims) and
less equity (residual claims).
Italso suggests that in such
cultures, managers (demand
side of capital) prefer debt to
equity for external finance.
On accounting policy
implications, first we find that
from 2004 through 2009, the
proportion of countries that
require quality disclosure

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