The Norm Theory of Capital Structure: International Evidence

International Review of Finance, 2013, Vol 13 (1), pp. 111-135

36 Pages Posted: 17 Nov 2011 Last revised: 23 Jul 2013

See all articles by Swee Sum Lam

Swee Sum Lam

National University of Singapore - NUS Business School

Weina Zhang

Department of Finance, National University of Singapore; National University of Singapore Risk Management Institute

Reginald Lee

Merrill Lynch & Co. - Merrill Lynch (Singapore) Pte. Ltd.

Date Written: May 30, 2012

Abstract

Akerlof (2007) proposes that the norms of decision makers can bridge the gap between New Classical economic theories and conflicting empirical evidence. We apply his framework to cross-country capital structure decision making and propose a norm theory of capital structure. Consistent with its predictions, we find that two principal components that represent the manager-subordinate relationship and the manager-environment relationship in a national culture are significantly and negatively related to the median leverage ratio at the country level. This study is among the first to provide a direct link between national culture and capital structure as made operational through managerial norms.

Keywords: national culture, capital structure, leverage, managerial norms, norm theory of capital structure

JEL Classification: G15, G32

Suggested Citation

Lam, Swee Sum and Zhang, Weina and Lee, Reginald Reagan Chua, The Norm Theory of Capital Structure: International Evidence (May 30, 2012). International Review of Finance, 2013, Vol 13 (1), pp. 111-135, Available at SSRN: https://ssrn.com/abstract=1960287 or http://dx.doi.org/10.2139/ssrn.1960287

Swee Sum Lam

National University of Singapore - NUS Business School ( email )

1 Business Link
Singapore, 117592
Singapore
+65 6516 3037 (Phone)
+65 6779 2083 (Fax)

HOME PAGE: http://www.bschool.nus.edu

Weina Zhang (Contact Author)

Department of Finance, National University of Singapore ( email )

Mochtar Riady Building
15 Kent Ridge Drive
Singapore, 119245
Singapore
65168120 (Phone)
67792083 (Fax)

HOME PAGE: http://bizfaculty.nus.edu/faculty-profiles/108-weina

National University of Singapore Risk Management Institute ( email )

21 Heng Mui Keng Terrace
Level 4
Singapore, 119613
Singapore

Reginald Reagan Chua Lee

Merrill Lynch & Co. - Merrill Lynch (Singapore) Pte. Ltd. ( email )

1 Temasek Avenue, #28-01
Millenia Tower
Singapore, Singapore 039192
Singapore

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