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The financial choices of large companies are also a question of culture

The financial choices of large companies are also a question of culture

What would happen if all companies in the same industry made identical decisions? No doubt their profitability ratios would be identical. And yet, although subject to similar constraints, we are still far from observing it.

A comparison between French and American giants in the tire, semiconductor and hotel sectors is a glaring example. We can, in fact, see significant differences.

Would the variable thus be national? We also note that the orders of magnitude of the differences change little between 2017 and 2021, except for the hotel industry, which has been particularly affected by the pandemic linked to the coronavirus.

How would the financial choices of companies in France, the United States, China, India, Japan, South Korea or Brazil differ, therefore? Our work highlights multiple links between national culture and a company’s financial choices.

culture and finance

Many economists, like the 2009 “Nobel” winner, Oliver Williamson, have highlighted a strong link between the traditions, norms and values ​​of a society with the development of a type of formal institutions, the system legal or the financial architecture of a country. These institutions indirectly constrain the life of companies: their creation, their mode of financing or even the relations between employers and employees.

Logically, some of the values ​​of the national culture are found in the operation of the company and in what is sometimes called the “corporate culture”. And during international development, the corporate culture will spread by taking these elements with it.

It remains to be seen, however, what is meant by “culture”. In the field of social sciences, the term receives no less than 300 definitions. All of them nevertheless have in common the notion of values ​​and beliefs shared by a group: “it is a system of collective meaning shared by the group through which the values, beliefs, customs and collective thoughts of the group are understood”.

In finance, many works are inspired by the matrix of cultural dimensions, imagined by the Dutch social psychologist Geert Hofstede from this definition. At the scale of a sovereign nation, it is made up of six sliders ranging between 0 and 100: individualism-collectivism, masculinity-femininity, aversion to uncertainty, power distance, long-term-short-term orientation and indulgence. -detention.

Who takes on long-term debt?

By applying this matrix to our financial database of nearly 6,000 companies from 33 countries, we found strong correlations with their financial structure.

Companies from countries that are more individualistic, less masculine, less averse to uncertainty and more long-term oriented have a higher than average long-term debt-to-equity ratio. This is the case of American, English, Canadian or Australian companies.

Symmetrically, the ratio of short-term debt to equity is higher for companies steeped in a less individualistic culture, more averse to uncertainty and more short-term oriented. This is the case for Japanese, South Korean, Taiwanese companies and Nordic European countries.

Despite the increasing globalization of trade, the values ​​of the national culture are thus transposed into the financial management of companies. The choice of a financial structure, which turns out to be fundamental to assess the financial health of a company because it has effects on its cost of external financing, remains strongly influenced by the values ​​of the national culture of the country of origin of the company.

This is a message addressed to analysts, investors and creditors: it seems essential to better understand the financial choices of firms, to better compare their financial ratios taking into account the values ​​of the national culture.

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