Skip to main content
SpringerLink
Log in

National culture and capital structure decisions: Evidence from foreign joint ventures in China

  • Article
  • Published:
Journal of International Business Studies Aims and scope Submit manuscript

Abstract

We investigate the role of firms’ country of origin in financial leverage decisions. Foreign joint ventures in China face a common set of country-level formal institutional constraints, but vary in the cultural values they bring from their countries of origin. We hypothesize that national culture enters the joint optimization process, leading to foreign joint ventures’ leverage decisions, and that it affects leverage decisions both directly and indirectly. Employing a hierarchical linear model distinguishing firm-level from country-level variables, and a data set covering over 8000 foreign joint ventures in China from 32 different countries and regions in the year 2002, we find that mastery has negative and significant direct effects on foreign joint ventures’ leverage and short-term debt decisions, and a positive and significant direct effect on the likelihood of foreign joint ventures having long-term debt. The indirect effects of mastery on leverage decisions sometimes reinforce and sometimes offset the direct effects. Embeddedness has no significant direct effect on foreign joint ventures’ leverage decisions, but exerts its influence entirely through indirect effects. Finally, the economic significance analysis of the total effects suggests that national culture has significant explanatory power in the leverage decisions of foreign joint ventures in China.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Figure 1
Figure 2

Similar content being viewed by others

Notes

  1. We thank an anonymous referee for this insight.

  2. In this paper, we assume that a foreign joint venture manager makes decisions that reflect the cultural values of the foreign joint venture's home country, even if the foreign joint venture manager is not from the same culture. Hofstede (1985) maintains that, in many cases, the corporate culture of a firm reflects the cultural values of its home country, which in turn affects the decisions of managers (even foreign managers). To the extent that foreign joint venture managers do not reflect the cultural values of their firm's home country, this would add noise to our empirical analysis, and bias our results against finding any effect of culture on foreign joint ventures’ leverage decisions.

  3. We thank an anonymous referee for this insight on high mastery.

  4. We thank an anonymous referee for the above discussion.

  5. We thank an anonymous referee for this insight on high embeddedness.

  6. Huang, Jin, and Qian (2010) employ the same foreign joint venture data set as we do to explore the role of ethnicity in foreign joint ventures, and demonstrate that ethnic Chinese invested joint ventures do not outperform non-ethnic firms.

  7. It is worth noting that excluding foreign joint ventures from Taiwan does not change our main results (results available upon request).

  8. Fan, Wong, and Zhang (2009) and Li et al. (2009) show that in China there are significant province-level variations in institutional development. In our empirical specification, we control for differences in the level of institutional development across different regions.

  9. The NBS started to provide information on accounts payable in 2005. We find that for a subset of our sample with available information on accounts payable, more than half of their short-term debt comes from short-term bank loans. The correlation between short-term debt and short-term debt excluding accounts payable is 0.755 for firms covered in the 2005 data, and 0.656 for our foreign joint venture subsample.

  10. The reason why we employ a binary variable to capture firms’ long-term leverage decision is the lack of variation for the majority of sample firms with zero long-term debt.

  11. China's accounting system began its reform in 1992. Thereafter, China's accounting standards for listed firms have been moving gradually toward the North American Generally Accepted Accounting Principles (GAAP).

  12. There are several reasons for our adoption of the lead-lag specification. First, the lead-lag structure is an attempt to minimize the potential endogeneity problem, given the structure of our data: the set-up of a foreign joint venture is a value-maximizing course of action, and financial leverage is only one outcome, as are the other firm characteristics. Second, the lead-lag structure is commonly used in prior research (e.g., Frank & Goyal, 2009). Lastly, using a contemporaneous specification leads to qualitatively the same results, because financial leverage is relatively stable over time, and our results are driven by cross-sectional variations.

  13. Fan and Wang (2004) construct a comprehensive marketization index to proxy for the market development of a province. It measures the following aspects: (1) the relationship between government and markets; (2) the development of non-state sectors in the economy; (3) the development of product markets; (4) the development of factor markets; and (5) the development of market intermediaries and the legal environment. See Li et al. (2009) for more detailed discussion of the index.

  14. Three countries are lost, as they have only a single observation. Our main results are not affected if we include these three country–firm observations.

  15. Note that using the level of foreign ownership as the founding date of the joint venture does not change our main results, which are based on the level of foreign ownership in 2002. Results are available upon request.

  16. Note that the correlation between the median leverage of a foreign joint venture and the corresponding leverage measure of domestic firms in the foreign joint venture's home country, using country-level observations, is positive and significant (unreported).

References

  • Bancel, F., & Mittoo, U. R. 2004. Cross-country determinants of capital structure choice: A survey of European firms. Financial Management, 33 (4): 103–132.

    Google Scholar 

  • Barnea, A., Haugen, R. A., & Senbet, L. W. 1980. A rationale for debt maturity structure and call provisions in the agency theoretic framework. Journal of Finance, 35 (5): 1223–1234.

    Article  Google Scholar 

  • Barnea, A., Haugen, R. A., & Senbet, L. W. 1981. Market imperfections, agency problems and capital structure: A review. Financial Management, 10 (3): 7–22.

    Article  Google Scholar 

  • Booth, L., Aivazian, V. A., Demirgüç-Kunt, A., & Maksimovic, V. 2001. Capital structure in developing countries. Journal of Finance, 56 (1): 87–130.

    Article  Google Scholar 

  • Bradley, M., Jarrell, G., & Kim, E. H. 1984. On the existence of an optimal capital structure: Theory and evidence. Journal of Finance, 39 (3): 857–878.

    Article  Google Scholar 

  • Chaplinsky, S. J., & Harris, R. S. 1996. Capital structure theory: A current perspective. Darden Case No. UVA-F-1165. Available at SSRN: http://ssrn.com/abstract=909392.

  • Chui, A. C. W., Lloyd, A. E., & Kwok, C. C. Y. 2002. The determination of capital structure: Is national culture a missing piece to the puzzle? Journal of International Business Studies, 33 (1): 99–127.

    Article  Google Scholar 

  • Chui, A. C. W., Titman, S., & Wei, K. C. J. 2010. Individualism and momentum around the world. Journal of Finance, 65 (1): 361–392.

    Article  Google Scholar 

  • Demirgüç-Kunt, A., & Maksimovic, V. 1998. Law, finance, and firm growth. Journal of Finance, 53 (6): 2107–2187.

    Article  Google Scholar 

  • Demirgüç-Kunt, A., & Maksimovic, V. 1999. Institutions, financial markets, and firm debt maturity. Journal of Financial Economics, 54 (3): 295–336.

    Article  Google Scholar 

  • Fan, G., & Wang, X. 2004. NERI index of marketization of China's provinces. Beijing: Economics Science Press.

    Google Scholar 

  • Fan, J. P. H., Wong, T. J., & Zhang, T. 2009. Institutions and organizational structures: The case of state-owned corporate pyramids, Working Paper, Chinese University of Hong Kong.

  • Fan, J. P. H., Titman, S., & Twite, G. 2010. An international comparison of capital structure and debt maturity choices, NBER Working Paper No. 16445, National Bureau of Economic Research.

  • Frank, M., & Goyal, V. K. 2009. Capital structure decisions: Which factors are reliably important? Financial Management, 38 (1): 1–37.

    Article  Google Scholar 

  • Giannetti, M. 2003. Do better institutions mitigate agency problems? Evidence from corporate finance choices. Journal of Financial and Quantitative Analysis, 38 (1): 185–212.

    Article  Google Scholar 

  • Goldstein, H. I. 2003. Multilevel statistical models, (3rd ed.). London: Edward Arnold.

    Google Scholar 

  • Graham, E. M., & Wada, E. 2001. Foreign direct investment in China: Effects on growth and economic performance. Working Paper No. 01–03, Institute for International Economics.

  • Grinblatt, M., & Keloharju, M. 2001. How distance, language, and culture influence stock holdings and trades. Journal of Finance, 56 (3): 1053–1073.

    Article  Google Scholar 

  • Guiso, L., Sapienza, P., & Zingales, L. 2006. Does culture affect economic outcomes? Journal of Economic Perspectives, 20 (2): 23–48.

    Article  Google Scholar 

  • Harris, M., & Raviv, A. 1991. The theory of capital structure. Journal of Finance, 46 (1): 297–355.

    Article  Google Scholar 

  • Harvey, C., Lins, K., & Roper, A. 2004. The effect of capital structure when expected agency costs are extreme. Journal of Financial Economics, 74 (1): 3–30.

    Article  Google Scholar 

  • Haugen, R. A., & Senbet, L. W. 1978. The insignificance of bankruptcy costs to the theory of optimal capital structure. Journal of Finance, 33 (2): 383–393.

    Article  Google Scholar 

  • Haugen, R. A., & Senbet, L. W. 1988. Bankruptcy and agency costs: Their significance to the theory of optimal capital structure. Journal of Financial and Quantitative Analysis, 23 (1): 27–38.

    Article  Google Scholar 

  • Hofstede, G. H. 1985. The interaction between national and organizational value systems. Journal of Management Studies, 22 (4): 347–357.

    Article  Google Scholar 

  • Hofstede, G. H. 2001. Culture's consequences: Comparing values, behaviors, institutions, and organizations across nations, (2nd ed.). Thousand Oaks, CA: Sage.

    Google Scholar 

  • House, R. J., Hanges, P. J., Javidan, M., Dorfman, P. W., & Gupta, V. 2004. Culture, leadership and organizations: The GLOBE study of 62 societies. Thousand Oaks, CA: Sage.

    Google Scholar 

  • Huang, Y., Jin, L., & Qian, Y. 2010. Does ethnicity pay? NBER Working Paper No. 16294, National Bureau of Economic Research.

  • Jensen, M. C. 1986. Agency costs of free cash flow, corporate finance and takeovers. American Economic Review, 76 (2): 323–339.

    Google Scholar 

  • Jensen, M. C., & Meckling, W. 1976. Theory of the firm: Managerial behavior, agency costs, and ownership structure. Journal of Financial Economics, 3 (4): 305–360.

    Article  Google Scholar 

  • La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. W. 1997. Legal determinants of external finance. Journal of Finance, 52 (3): 1131–1150.

    Article  Google Scholar 

  • Li, K., Yue, H., & Zhao, L. 2009. Ownership, institutions, and capital structure: Evidence from China. Journal of Comparative Economics, 37 (3): 471–490.

    Article  Google Scholar 

  • Li, K., Griffin, D., Yue, H., & Zhao, L. 2011. Cultural values and corporate risk-raking, Working Paper, University of British Columbia.

  • Licht, A. N., Goldschmidt, C., & Schwartz, S. H. 2007. Culture rules: The foundations of the rule of law and other norms of governance. Journal of Comparative Economics, 35 (4): 659–688.

    Article  Google Scholar 

  • Martin, K. D., Cullen, J. B., Johnson, J. L., & Parboteeah, K. P. 2007. Deciding on bribe: A cross-level analysis of firm and home country influences on bribery activity. Academy of Management Journal, 50 (6): 1401–1422.

    Article  Google Scholar 

  • Myers, S. 1977. Determinants of corporate borrowing. Journal of Financial Economics, 5 (2): 147–175.

    Article  Google Scholar 

  • Myers, S. 1984. The capital structure puzzle. Journal of Finance, 39 (3): 575–592.

    Article  Google Scholar 

  • Myers, S., & Majluf, N. S. 1984. Corporate financing and investment decisions when firms have information that investors do not have. Journal of Financial Economics, 13 (2): 187–222.

    Article  Google Scholar 

  • North, D. C. 1993. Economic institutions through time, Nobel Lecture.

  • Pagano, M., Röell, A. A., & Zechner, J. 2002. The geography of equity listing: Why do companies list abroad? Journal of Finance, 57 (6): 2651–2694.

    Article  Google Scholar 

  • Rajan, R., & Zingales, L. 1995. What do we know about capital structure? Some evidence from international data. Journal of Finance, 50 (5): 1421–1460.

    Article  Google Scholar 

  • Rajan, R., & Zingales, L. 1998. Financial dependence and growth. American Economic Review, 88 (3): 559–586.

    Google Scholar 

  • Raudenbush, S. W., & Bryk, A. S. 2002. Hierarchical linear models: Applications and data analysis methods. Advanced quantitative techniques in the social science series. Thousand Oaks, CA: Sage.

    Google Scholar 

  • Sarkissian, S., & Schill, M. J. 2004. The overseas listing decision: New evidence of proximity preference. Review of Financial Studies, 17 (3): 769–809.

    Article  Google Scholar 

  • Schwartz, S. H. 2004. Mapping and interpreting cultural differences around the world. In H. Vinkins, J. Soeters, & P. Esters (Eds), Comparing cultures: Dimensions of culture in a comparative perspective: 43–73. Boston, MA: Brill Academic Publishers.

    Google Scholar 

  • Shao, L., Kwok, C. C. Y., & Guedhami, O. 2010. National culture and dividend policy. Journal of International Business Studies, 41 (8): 1391–1414.

    Article  Google Scholar 

  • Siegel, J. I., Licht, A. N., & Schwartz, S. H. 2010. Egalitarianism, cultural distances, and FDI: A new approach. Working Paper, Harvard Business School.

  • Siegel, J. I., Licht, A. N., & Schwartz, S. H. 2011. Egalitarianism and international investment. Journal of Financial Economics (forthcoming).

  • Stulz, R. M., & Williamson, R. 2003. Culture, openness, and finance. Journal of Financial Economics, 70 (3): 313–349.

    Article  Google Scholar 

  • Titman, S. 1984. The effect of capital structure on a firm's liquidation decision. Journal of Financial Economics, 13 (1): 137–152.

    Article  Google Scholar 

Download references

Acknowledgements

We thank the editor, Lemma Senbet, three anonymous referees, Naohiko Baba, Julan Du, Vikas Mehrotra, Michael Meloche, and conference participants at the 2008 China International Conference in Finance (Dalian), the AsianFA-NFA 2008 International Conference (Yokohama), the 2008 Northern Finance Association Meetings (Kananaskis), and the 2009 Journal of Corporate Finance Conference on Corporate Finance and Governance in Emerging Markets (Beijing) for helpful comments. We thank Huasheng Gao for research assistance. Li and Griffin acknowledge financial support from the Social Sciences and Humanities Research Council of Canada. Yue and Zhao acknowledge financial support from the National Natural Science Foundation of China (Approval numbers 70702002, 70873002 and 70932002). We are responsible for all errors.

Author information

Authors and Affiliations

  1. Sauder School of Business, University of British Columbia, Vancouver, Canada

    Kai Li & Dale Griffin

  2. Guanghua School of Management, Peking University, Beijing, P.R. China

    Heng Yue & Longkai Zhao

Authors
  1. Kai Li
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Dale Griffin
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Heng Yue
    View author publications

    You can also search for this author in PubMed Google Scholar

  4. Longkai Zhao
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Kai Li.

Additional information

Accepted by Lemma Senbet, Area Editor, 20 December 2010. This paper has been with the authors for five revisions.

APPENDIX

APPENDIX

See Tables A1 and A2.

Table A1 Sample overview
Full size table
Table A2 Industry classification and distribution
Full size table

Rights and permissions

Reprints and permissions

About this article

Cite this article

Li, K., Griffin, D., Yue, H. et al. National culture and capital structure decisions: Evidence from foreign joint ventures in China. J Int Bus Stud 42, 477–503 (2011). https://doi.org/10.1057/jibs.2011.7

Download citation

  • Received:

  • Revised:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1057/jibs.2011.7

Keywords

Search

Navigation