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National culture and leverage adjustments

Svetlana Orlova (Finance, Operations Management and International Business, The University of Tulsa, Tulsa, Oklahoma, USA)
Grant Harper (MBA, The University of Tulsa, Tulsa, Oklahoma, USA)

Review of Behavioral Finance

ISSN: 1940-5979

Article publication date: 19 March 2021

Issue publication date: 16 June 2022

256

Abstract

Purpose

The purpose of this paper is to explore the impact of national culture on leverage speed of adjustment (SOA) across countries.

Design/methodology/approach

We use a partial adjustment model to estimate the impact of national culture (assessed using Hofstede's six cultural dimensions) on leverage SOA.

Findings

We find that culture does significantly affect the degree to which firms deviate from target debt level and the speed of adjustment (SOA) of leverage. High power distance, individualism and masculinity are associated with a slower SOA, while high long-term orientation, uncertainty avoidance and indulgence result in a faster SOA. Additionally, cultural characteristics affect leverage SOA differently when firms are underlevered versus overlevered and when firms have small versus large deviations from the target level of debt. We suggest that these effects can be explained by agency motives.

Research limitations/implications

The results of the study are based on available information for firms from 53 countries.

Originality/value

This study is, to the best of our knowledge, the first to examine the impact of national cultural traits on leverage SOA in international settings.

Keywords

Citation

Orlova, S. and Harper, G. (2022), "National culture and leverage adjustments", Review of Behavioral Finance, Vol. 14 No. 3, pp. 410-435. https://doi.org/10.1108/RBF-09-2020-0229

Publisher

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Emerald Publishing Limited

Copyright © 2021, Emerald Publishing Limited

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