Collectivism and the Costs of High Leverage
68 Pages Posted: 26 Jul 2017 Last revised: 12 Mar 2019
Date Written: July 24, 2017
Prior literature shows that high leverage is associated with losses in market share due to unfavorable actions by customers and competitors. Building on this literature, we investigate the effect of collectivism on the product market performance of highly leveraged firms. Using a sample of 46 countries over the 1989–2016 period, we find significantly lower costs of high leverage for countries with higher collectivism scores. Moreover, we find that the impact of collectivism on high leverage costs is more pronounced for firms with high product specialization and with financially healthy rivals. In additional analysis, we find that collectivism helps highly leveraged firms retain employees and obtain trade credit from suppliers. Our findings thus suggest that a country’s culture affects corporate financial outcomes by influencing the actions of firm stakeholders.
Keywords: Collectivism, National Culture, Costs of High Leverage, Stakeholder Theory, Predation Theory
JEL Classification: G32
Suggested Citation: Suggested Citation