Collectivism and the Costs of High Leverage

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