Influence of National Culture on Accounting Conservatism and Risk Taking in the Banking Industry

Abstract

Using an international sample of banks and country-level indices for individualism and uncertainty avoidance as proxies for national culture, we study how differences in culture across countries affect accounting conservatism and bank risk taking. Consistent with expectations, our cross-country analysis indicates that individualism is negatively (positively) related to conservatism (risk taking) and uncertainty avoidance is positively (negatively) related to conservatism (risk taking). We also find that cultures that encourage higher risk taking experienced more bank failures and bank troubles during the recent financial crisis.

Keywords: National culture, Accounting Conservatism, Risk taking, Individualism, Uncertainty avoidance, Banking

JEL Classification: G21, G28, G34