National Culture's Influence on the Capital Structure of SMEs

Abstract

Many studies examine the determinants of SME capital structure. The effects of both firm and institution level factors are well documented but there is still unknown influence behind SME capital structure: national culture. Reflecting on the sparse evidence on listed firms, this study explores the question whether national culture influences decision making which determines the capital structure of unlisted SMEs. This is examined both for SMEs as a whole and for three subsamples of micro, small and medium firms.

Of Schwartz’s latest (2008) cultural dimensions Embeddedness, Hierarchy and Mastery are used in conjunction with a panel data sample (2006-2010) of almost 900,000 observations from nine countries spread across three continents. The empirical analysis is based on a stratified re-sampling approach. The results show that Hierarchy and Embeddedness are negatively related to debt levels. However, very limited evidence is found that Mastery is positively related to debt. The effect of culture is consistent in the full sample and throughout the subsamples. These results are robust when tested using an alternative model, lagged asset values and Hofstede’s cultural values.

These findings provide strong evidence that national culture affects SME capital structure. A significant relationship between debt and Embeddedness suggests cultures which value security and public appearance usually have lower debt levels. A negative relationship between Hierarchy and debt suggests that managers who operate in cultures where power, authority and wealth are important cultural values prefer to use less debt because taking on debt results in the manager losing some control to debt providers. Countries with these cultural values prefer to retain maximum control.

These findings confirm that cross-cultural variation in risk perceptions and control issues can cause differences in SME capital structure. The effect of national culture is consistent throughout all SMEs in the same country indicating that firms will behave collectively with regard to leverage. Because SMEs play such a large role in any economy, this could have wider implications for any individual economy.