The Investment Cash Flow Relationship: Does National Culture Matter?

42 Pages Posted: 8 Nov 2014 Last revised: 1 Mar 2016

Eilnaz Kashefi-Pour

University of Birmingham - Birmingham Business School

Shima Amini

University of Leeds; University of Leeds - Division of Accounting and Finance

Darren Duxbury

Newcastle University Business School

Date Written: February 25, 2016

Abstract

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

Kashefi-Pour, Eilnaz and Amini, Shima and Duxbury, Darren, The Investment Cash Flow Relationship: Does National Culture Matter? (February 25, 2016). Available at SSRN: https://ssrn.com/abstract=2520059 or http://dx.doi.org/10.2139/ssrn.2520059

Eilnaz Kashefi-Pour (Contact Author)

University of Birmingham - Birmingham Business School ( email )

Edgbaston Park Road
Birmingham, B15 2TY
United Kingdom

Shima Amini

University of Leeds ( email )

Leeds, LS2 9JT
United Kingdom

University of Leeds - Division of Accounting and Finance ( email )

Leeds LS2 9JT
United Kingdom

Darren Duxbury

Newcastle University Business School ( email )

Newcastle upon Tyne, NE1 7RU
United Kingdom
+44(0)191 208 1517 (Phone)

HOME PAGE: http://www.ncl.ac.uk/nubs/staff/profile/darren.duxbury

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