Individualism, Risk Aversion, and Authoritarian Control: International Evidence on the Influence of Social Norms on Capital Structure Decisions

41 Pages Posted: 6 Sep 2012

See all articles by Larry Fauver

Larry Fauver

University of Tennessee, Knoxville - Department of Finance; University of Tennessee

Michael McDonald

Fairfield University - Charles F. Dolan School of Business

Date Written: August 21, 2012

Abstract

We examine the impact of social norms (individualism, risk aversion, and authoritarian control index) on firm capital structure in the G20 countries from 1995 through 2009. Our results show that increases in individualism increase firm willingness to use debt and decrease the average cost of capital (a move from below median to above median individualism within developed countries translates to a roughly 1.9% decrease in the cost of capital). Increases in risk aversion have the opposite effect, increasing the cost of capital by an average of 1.7% in developed economies for a below median to above median move. A 2% change in the cost of capital translates to approximately $12 million annually in debt interest service for the average firm. Our results are robust to alternative social norms measures, measures of the debt cost of capital, differences in legal structure, transparency, and enforcement levels.

Keywords: Capital Structure, International, Behavioral

Suggested Citation

Fauver, Larry and McDonald, Michael, Individualism, Risk Aversion, and Authoritarian Control: International Evidence on the Influence of Social Norms on Capital Structure Decisions (August 21, 2012). Midwest Finance Association 2013 Annual Meeting Paper, Available at SSRN: https://ssrn.com/abstract=2133587 or http://dx.doi.org/10.2139/ssrn.2133587

Larry Fauver

University of Tennessee, Knoxville - Department of Finance ( email )

424 Stokely Management Center
Knoxville, TN 37996
United States

University of Tennessee ( email )

424 Stokely Management Center
Department of Finance
Knoxville, TN 37996-0540
United States
865-974-1722 (Phone)
865-974-1716 (Fax)

Michael McDonald (Contact Author)

Fairfield University - Charles F. Dolan School of Business ( email )

N. Benson Road
Fairfield, CT 06824
United States

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