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National culture and the cost of debt

Author

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  • Chui, Andy C.W.
  • Kwok, Chuck C.Y.
  • (Stephen) Zhou, Gaoguang

Abstract

This study investigates how Schwartz’s cultural dimensions of embeddedness and mastery affect the corporate cost of debt through bankruptcy risk and sensitivity to agency activity channels. Using data from 33 countries, we find a strong and robust negative relation between embeddedness and the cost of debt. The estimated relation between mastery and the corporate cost of debt is negative and significant in most of the tests. Further analyses reveal that the development of financial intermediation and the enforcement of insider trading law moderate the relation between culture and the cost of debt. Confirming our hypotheses, we document that embeddedness is negatively related to bankruptcy risk and sensitivity to agency activity. We find that mastery is positively related to bankruptcy risk across countries as well, but this relation is weaker. We also show that mastery is positively related to sensitivity to agency activity among countries with highly leveraged firms.

Suggested Citation

  • Chui, Andy C.W. & Kwok, Chuck C.Y. & (Stephen) Zhou, Gaoguang, 2016. "National culture and the cost of debt," Journal of Banking & Finance, Elsevier, vol. 69(C), pages 1-19.
    • Handle: RePEc:eee:jbfina:v:69:y:2016:i:c:p:1-19
    DOI: 10.1016/j.jbankfin.2016.04.001
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    More about this item

    Keywords

    National culture; Cost of capital; Bankruptcy; Agency cost; Embeddedness; Mastery;
    All these keywords.

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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