How Does Culture Influence Corporate Risk-Taking?

Abstract

We investigate the role of national culture and earnings management in corporate risk-taking. First, we postulate that culture influences managerial risk-taking directly through its effect on individual decision-making and indirectly through its effect on a country’s formal institutions and a firm’s managerial practices. Second, we postulate that the influence of culture is conditioned on measures of earnings management and firm size. Using firm-level data from 35 countries and employing a hierarchical linear modeling approach to isolate the effects of firm-level and country-level variables, we show that individualism has positive and significant direct effects, whereas uncertainty avoidance has negative and significant direct effects on corporate risk-taking. Our economic significance analysis of the total effects suggests that culture has significant explanatory power in corporate risk-taking. Greater earnings management strengthens and larger firm size weakens the effects of culture on corporate risk-taking.

Keywords: harmony, individualism, national culture, risk-taking, uncertainty avoidance

JEL Classification: G32, G11, G18