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Retrospective wisdom: Long-term orientation and the rating downgrades of financial institutions

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  • Dang, Huong Dieu

Abstract

This study examines the effects of Hofstede's long-term orientation (LTO) on rating changes in financial institutions (FIs) in 50 countries. The impacts of LTO on rating downgrades are stronger for the speculative grade-rated FIs and more pronounced for the crises sample. The significance effect of LTO on downgrades is robust to various tests and is unlikely due to endogeneity. Switching from a short-term-oriented to a long-term-oriented (LT-oriented) culture lowers the downgrade risk of an FI by 47%, a speculative grade-rated FI by 56%, and an FI of a country in crisis by 58%. LT-oriented societies promote responsible borrowing and a good payment culture. A strong preference for long-term business survival motivates banks in LT-oriented nations to maintain a more prudent bank credit-to-bank deposits ratio, particularly during crises. Incorporating the LTO in banking regulations may encourage banks to adopt long-term perspectives and finance sustainable long-term projects.

Suggested Citation

  • Dang, Huong Dieu, 2023. "Retrospective wisdom: Long-term orientation and the rating downgrades of financial institutions," Global Finance Journal, Elsevier, vol. 57(C).
    • Handle: RePEc:eee:glofin:v:57:y:2023:i:c:s1044028323000522
    DOI: 10.1016/j.gfj.2023.100857
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    Keywords

    Long-term orientation; Universal time preference; Hofstede; World value survey; Financial institutions; Rating downgrades;
    All these keywords.

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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