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The impact of confucian culture on the cost of equity capital: The moderating role of marketization process

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  • Tan, Huan
  • Wang, Zhi

Abstract

The cost of equity capital (COEC) is a crucial component of investment decisions and corporate performance evaluations. In the process of corporate financing, an inadequate formal system may lead to the phenomenon of “Bad money drives out good”. While Confucian culture can compensate for the deficiency of the formal system by influencing the value orientation of the actors. Therefore, this paper examines the impact of Confucian culture on firms’ cost of equity capital (COEC) from an informal institutional perspective. Our study presents robust findings that firms headquartered in areas with strong Confucian culture have lower costs of equity capital, and the marketization process has a moderating effect on the relationship between Confucian culture and the COEC. The impact of Confucian culture on the COEC of firms is mainly achieved through three ways: reducing information risk, reducing business risk and mitigating agency problems. Further, foreign cultural shocks will weaken the relationship between Confucian culture and the COEC. These results remain robust after controlling for the endogeneity problem. This study indicates that Confucian culture, as an invisible complementary governance mechanism of the formal system, plays an important and positive role in “reducing the COEC”.

Suggested Citation

  • Tan, Huan & Wang, Zhi, 2023. "The impact of confucian culture on the cost of equity capital: The moderating role of marketization process," International Review of Economics & Finance, Elsevier, vol. 86(C), pages 112-126.
    • Handle: RePEc:eee:reveco:v:86:y:2023:i:c:p:112-126
    DOI: 10.1016/j.iref.2023.03.010
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    2. Bin Li & Honglei Li & Guangfan Sun & Jiayi Tao & Chongluan Lu & Changwei Guo, 2024. "Speculative culture and corporate high-quality development in China: mediating effect of corporate innovation," Palgrave Communications, Palgrave Macmillan, vol. 11(1), pages 1-10, December.

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    More about this item

    Keywords

    Confucian culture; Cost of equity capital; Informal system; Information risk; Business risk; Agency problems;
    All these keywords.

    JEL classification:

    • G39 - Financial Economics - - Corporate Finance and Governance - - - Other
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General
    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East

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