Individualism, Risk Aversion, and Authoritarian Control: International Evidence on the Influence of Social Norms on Capital Structure Decisions
41 Pages Posted: 6 Sep 2012
Date Written: August 21, 2012
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
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