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Why does knowing the nationality of the company help predict its financial leverage? Differences in institutional backgrounds provide only a partial answer to this question. This study suggests that national culture affects corporate capital structures. Empirical hypotheses, drawn from financial models and cross-cultural psychology, are tested against a sample of 5591
firms across 22 countries. Results show that countries with high scores on the cultural dimensions of " conservatism" and "mastery" tend to have lower corporate debt ratios. The effects are strong and remain significant even after accounting for differences in economic performance, legal systems, financial institutions, and some other wellknown determinants of debt ratios.
Capital structure is a topic that has received much attention in the financial management arena. However, despite the extensive body of literature surrounding the question of an optimal capital structure and the numerous attempts to explain capital structure determinants, efforts have proved to be inconclusive (Harris and Raviv, 1991). Moreover, most of the empirical studies on the determinants of capital structure have been based on firms in the United States. Little is known about what causes the capital structure to be different in other countries. Aggarwal (1981) analyzes 500 largest European firms and concludes that country factor is an important determinant of capital structure.
However, Kester (1986) finds that only firms in the mature, capital intensive industries in Japan are using more debts than their counterpart in the U.S. Sekely and Collins (1988), on the other hand, provide evidences on the differences in capital structure across 23 countries. Borio (1990) also suggests that firms in Japan and Continental Europe are more highly leveraged than firms in the U.S.
Apart from looking for a country effect on the capital structure choices, recent researches also focus on whether capital structure theory can be applied to firms in different countries. Rajan and Zingales (1995) examine the leverage decisions of the firms belonging to the G-7 countries over the period from 1987 to 1991 and document that capital structure of the firms in each of the G-7 countries is determined by similar factors, such as tangibility of assets, the marketto-book ratio, firm size, and profitability.
However, they find that while national capital structure is fairly similar across these countries, some differences remain....