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Cultural Preferences and the Choice between Formal and Informal Financing

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  • Bedendo, Mascia
  • Garcia-Appendini, Emilia
  • Siming, Linus

Abstract

This paper documents significant differences in the financing structure of small firms with managers of diverse cultural backgrounds. To separate the effect of culture from other factors that affect the financing structure of firms, we exploit cultural heterogeneity within a geographical area with shared regulations, institutions, and macroeconomic cycles. Our findings suggest that there exist significant differences in the culturally embedded preferences towards the use of formal and informal sources of financing (bank loans and trade credit). Our results are robust to alternative explanations based on potential differences in credit constraints and in the distribution of cultural origins across industrial sectors, trading partners, and headquarters location.

Suggested Citation

  • Bedendo, Mascia & Garcia-Appendini, Emilia & Siming, Linus, 2017. "Cultural Preferences and the Choice between Formal and Informal Financing," Working Papers on Finance 1707, University of St. Gallen, School of Finance.
    • Handle: RePEc:usg:sfwpfi:2017:07
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    More about this item

    Keywords

    Managerial cultural origin; Informal financing; Trade credit; Small firm financing;
    All these keywords.

    JEL classification:

    • Z10 - Other Special Topics - - Cultural Economics - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • M14 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Corporate Culture; Diversity; Social Responsibility

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