The Investment Cash Flow Relationship: Does National Culture Matter?
Posted: 8 Nov 2014 Last revised: 28 Feb 2019
Date Written: February 25, 2016
We investigate the effect of national culture on corporate investment-cash flow sensitivity. The extant literature on corporate investment explains investment-cash flow sensitivity using agency and asymmetric information theories. In this paper we argue that culture affects perceptions of, and reactions to, agency and information asymmetry. Hence, we expect investment-cash flow sensitivity to be determined not only by objective assessment of the severity of agency and information asymmetry problems in firms, but also by the subjective perceptions of managers, shareholders, and corporate outsiders with regard to these problems. Using Hofstede’s four cultural dimensions (collectivism, uncertainty avoidance, power distance, and masculinity) we find that uncertainty avoidance, power distance, and masculinity have a positive effect on investment-cash flow sensitivity, whereas collectivism has a negative effect for a sample of 109,807 firm-years from 24 OECD countries between 1990 and 2011. Our results hold even after accounting for alternative statistical approaches, sample compositions, and measures of cultural dimensions.
Keywords: National Culture, Investment Cash Flow Sensitivity, Information Asymmetry, Agency Theory
JEL Classification: G31, M14, Z10
Suggested Citation: Suggested Citation