Collectivism and the Costs of High Leverage

69 Pages Posted: 26 Jul 2017 Last revised: 15 Jun 2018

See all articles by Sadok El Ghoul

Sadok El Ghoul

University of Alberta - Campus Saint-Jean

Omrane Guedhami

University of South Carolina - Moore School of Business

Chuck C.Y. Kwok

University of South Carolina - Darla Moore School of Business

Ying Zheng

Bryant University

Date Written: July 24, 2017

Abstract

Prior research suggests that high leverage costs can be substantial due to unfavorable actions by customers and competitors that reduce highly leveraged firms’ market shares. We find that these costs are mitigated in collectivist countries through two potential channels of influence: tight group structures and mental conditioning. Our main evidence is robust to addressing endogeneity concerns, using alternative measures of culture and high leverage costs, and addressing alternative explanations. Moreover, we find that the impact of collectivism on high leverage costs is more pronounced for firms that are likely to experience more severe costs of high leverage, namely, those with high product specialization and with financially healthy rivals. We extend our analysis to include employee and supplier stakeholder groups and find that collectivism helps highly leveraged firms retain employees and obtain trade credit from suppliers. Collectively, our findings suggest that national culture affects corporate financial outcomes by simultaneously influencing key stakeholders in the firm and its environment.

Keywords: Collectivism, National Culture, Costs of High Leverage, Stakeholder Theory, Predation Theory

JEL Classification: G32

Suggested Citation

El Ghoul, Sadok and Guedhami, Omrane and Kwok, Chuck C.Y. and Zheng, Ying, Collectivism and the Costs of High Leverage (July 24, 2017). Available at SSRN: https://ssrn.com/abstract=3007493 or http://dx.doi.org/10.2139/ssrn.3007493

Sadok El Ghoul (Contact Author)

University of Alberta - Campus Saint-Jean ( email )

Edmonton, Alberta T6G 2R3
Canada
780-465-8725 (Phone)
780-465-8760 (Fax)

Omrane Guedhami

University of South Carolina - Moore School of Business ( email )

Columbia, SC
United States

Chuck C.Y. Kwok

University of South Carolina - Darla Moore School of Business ( email )

1705 College St
Francis M. Hipp Building
Columbia, SC 29208
United States
803-777-3606 (Phone)
803-777-3609 (Fax)

Ying Zheng

Bryant University

1150 Douglas Pike
Smithfield, RI 02917
United States
8033189733 (Phone)

Register to save articles to
your library

Register

Paper statistics

Downloads
21
Abstract Views
174
PlumX Metrics