Long-Term Orientation and Relationship Lending – A Cross-Cultural Study on the Effect of Time Preferences on the Choice of Corporate Debt

Abstract

We examine how time preferences impact the financing decision of firms. We hypothesize that the degree of long-term orientation in a country is positively related to the use of bank relationship lending. Based on a thorough theoretical investigation and an extensive empirical analysis using a large, worldwide dataset, we find strong support for our hypothesis on the role of time preferences for financial intermediation. Our results are robust to controlling for other determinants of the choice of debt financing as well as to applying alternative variables and different estimation methods. Firms in long-term orientation countries appear to prefer relationship bank financing, since it is usually available for the long run and will not be with-drawn quickly in response to adverse developments. This allows managers to preserve a more strategic view and pursue longer planning horizons.

Keywords: Agency Theory, Bank Loans, Financial Intermediation, National Culture, Relationship Lending

JEL Classification: A13, F30, G21, G32, Z10