The Influence of National Culture on Accounting and Finance
Citation:Chandrasena, Supun Mekhala, The Influence of National Culture on Accounting and Finance, Trinity College Dublin.School of Business, 2021
Supun Chandrasena 16342137 PhD Thesis.pdf (PDF) 5.269Mb
This thesis, empirically analyses the role of cultural aspects in accounting and finance disciplines from diverse perspectives. It is made up of three distinct research papers. The first paper (chapter 4) primarily investigates the impact of sociocultural factors in underpinning early accounting thought in an ancient civilization (Ceylon-presently known as Sri Lanka). The next two papers maintain cultural aspects in the limelight but shift the focus to the modern corporate world. Precisely, the second paper (chapter 5) examines the role of Chief Executive Officer's (CEO) cultural values in the firm leverage decision. The third paper (chapter 6) extends the work of chapter 5 and proposes that a firm does not associate with only a single culture, which has been the conventional research focus, but that firms operate with a multiplicity of cultures. Therefore chapter 6 empirically analyses the impact of cultural differences among the CEO, board of directors and stakeholders in a firm, on determining its idiosyncratic risk. Therefore, this thesis emphasizes the impact of culture on various accounting and finance aspects from a context ranging from antiquity to modern times. Another notable feature is that chapters 5 and 6 of this thesis, transcend the previous common focus of firm nationality based on country of origin and study cultural influences on corporate decision-making at a granular level, i.e. by examining the cultural values of the key players in a firm (e.g. the CEO, board of directors, stakeholders). Overall, it contributes to the existing literature on the impact of culture in Accounting and Finance outcomes. Chapter 4 goes back in time to the 1st-2nd centuries A.D. in ancient Ceylon (presently Sri Lanka) and employs content analysis method to study the English translations of 122 lithic and other inscriptions during the period from 1st century A.D. to the 16th century A.D. The study refers to an array of accounting and non-accounting practices in the ancient days and finds the existence of well-articulated forms of 'kingship accounting' and 'Buddhist temple accounting' practices that were engraved in rock walls or formations in ancient Ceylon. Furthermore this paper sheds light on the existence of cultural, socio-economic, political and technological infrastructure that underpinned the early accounting system, with special reference to the sociocultural landscape in ancient Ceylon that was largely governed by Buddhist philosophies. The study reveals that sociocultural factors exerted a dual impact, i.e. direct and indirect, on early accounting thought. The sociocultural factors that compelled accounting practices to be undertaken in ancient Buddhist monasteries signifies the direct impact, whilst the indirect impact encompasses the role of Buddhist cultural values in shaping the ancient political, technological (literacy, numerical technology and coinage) and economic landscape, which in turn underpinned early accounting thought. This study is unique as it brings to the fore, the influence of socio-cultural factors that prevailed during the ancient era, in ensuring the continuation of early accounting practices. Following a thorough literature review in a Ceylonese context, the researcher believes that this is among the first attempts to do so. Chapter 5 (and subsequently chapter 6) focuses on cultural implications in a modern corporate setting. Chapter 5, in particular, focuses on the influence of CEO's cultural values on the firm leverage decision. It is well-known that debt can mitigate agency problems between managers and stockholders, by minimizing free cash-flows. However, the implicit factors that might motivate a manager to voluntarily choose debt discipline is barely researched. Chapter 5, therefore, focuses on managerial traits conditioned by national culture and their impact on firm leverage decision. This study is novel as it transcends the previous conventional emphasis on a firms' nationality on the leverage decision by focusing on the CEO's cultural origin and proposes that national cultural values of CEOs distort their perception of costs and benefits of debt. In addition to testing the association between CEO culture and firm leverage, the model is extended to closely examine the same, given three scenarios, i.e. when the existing firm leverage is low, moderate and high. By scrutinizing a sample of 594 CEOs, originating from 14 different nationalities, serving 317 Fortune 500 firms in the U.S., during 2000 to 2015 and by employing quantile panel regression with instrumental variables, the study reveals that high mastery CEOs, unknowingly, are in the pursuit of a target capital structure whilst highly embedded CEOs choose to borrow, irrespective of the current firm leverage. Apparently, high mastery CEOs make capital structure decisions that are more in the interest of shareholders, while the capital structure decisions of highly embedded CEOs might be detrimental to the firm. A direct link between cultural values and leverage, has been detected and confirmed via an analysis of a major exogenous intervention (global financial crisis 2007/08) to the system. By using a sample of non-US CEOs, the study reveals that cultural values are portable. Results remain robust to alternative specifications and procedures to mitigate endogeneity concerns. Academically the findings of this paper open up new paradigms that need to be considered in the area of agency conflicts and monitoring costs. Chapter 6 extends the previous work in Chapter 5 and proposes that a firm does not associate with just a single culture but operates with a multiplicity of cultures. Owing to the recent public pressure to increase diversity on boards, firms increasingly employ foreign nationals as board of directors and/or CEOs. As the employees, investors and other stakeholders are mostly local, how would they interact with a foreign CEO and/or board of directors? More importantly how would this interaction among a multiplicity of cultures affect the firm idiosyncratic risk? Whilst the cultural impact on firm outcomes has remained in the spotlight for the last decade or so, the interaction of a multiplicity of cultures within a firm and its impact on corporate outcomes is rarely studied. The study initially employs Feasible Generalized Least Squares Method (FGLS) and then the Dynamic Panel System Generalized Method of Momentum (DPS-GMM) to analyse a sample of 1,190 firms from 12 European countries, over 14 years from 2005 to 2018. The findings reveal that the cultural distance between the CEO and stakeholders, on firm risk, appear to remain positive and strongly significant, regardless of endogeneity correction and various other robustness tests, inferring that the greater cultural distances and the resulting disarray of preferences of CEOs and stakeholder groups may result with CEOs making unpredictable decisions, ultimately increasing performance volatility. CEO' board cultural distance evinces a negative association, which proves statistically significant in most of the endogeneity corrected regression models, implying that a greater distance between the CEO and the board of directors is beneficial to a company as the board will play a more independent and active role in preventing the management from participating in value destroying risky ventures and making strategic decisions single-handedly. Within-board cultural distances generate mixed results. Moreover, to allow for the asymmetries between cultural distances and firm risk, quantile panel regression is employed. Whilst the first two cultural spheres reinforce the previous findings, within-board cultural distances appear to reduce stock performance volatility, in firms with moderate idiosyncratic risks, where the same is amplified in least volatile and most volatile firms, implying that the extra social and human capital that would be brought in to the firm by culturally diverse directors, would help to position the firm better in terms of managing risks, only in moderately uncertain environments. The results of this study remain robust to alternative specifications and endogeneity concerns. To the best of my knowledge, this paper is among the first, to investigate the co-existence of a multiplicity of cultures within a firm and its impact on firm performance volatility. Overall, the objective of this doctoral thesis is to improve the existing knowledge on the subtle and understated influences of cultural differences and resulting human behaviour on business outcomes.
Author: Chandrasena, Supun Mekhala
Publisher:Trinity College Dublin. School of Business. Discipline of Business & Administrative Studies
Type of material:Thesis
Availability:Full text available