• No results found

Chapter 3 Previous Empirical studies and Hypotheses development

3.1 CEO characteristics and Capital Structure

3.1.6 CEO Nationality

Cultural values are not new, with Hofstede’s cultural dimensions (1980:2001) first identifying individualism (versus collectivism), uncertainty avoidance and harmony

(versus mastery). Cultures that have high levels of individualism focus on individual

freedom and achievement, whilst cultures that are at the lower spectrum of individualism

6 2011


have strong group cohesion. Cultures that score high on the uncertainty avoidance

spectrum prefer clear rules and dislike ambiguous situations, those cultures that have low

uncertainty avoidance prefer events that are novel and prefer innovation. Cultures that

are towards the high spectrum of the harmony value learn to accept situations and

decisions as they are, while those cultures with low levels of harmony emphasis their

assertiveness to advance personal and group goals. The UK is high on the spectrum for

individualism, high on uncertainty avoidance and low on harmony (Li et al., 2013). This

study focuses on non-financial companies and considers the implications that these

cultural measures could have on decisions that are made during board meetings; the focus

of the study is on the nationality of the CEO.

Schwartz (1994:2004) has built on Hofstede’s work to develop cultural value orientations. Schwartz developed six values types, including conservatism, which is

primarily concerned with security, conformity and tradition. The impact that culture

could have on capital structure is focused around how the uptake of high levels of debt in

a company’s capital structure, could lead to a higher risk of liquation. The costs that arise due to the liquation of a company include costs to the workers, suppliers and customers

(Titman, 1984). Companies in conservative societies would emphasis harmony, and try

to avoid liquation costs through having lower debt levels. Secondly, a company’s public

image is highly regarded in conservative societies. The threat of bankruptcy is a sign of

losing public’s image, therefore in order to reduce this threat lower debt levels could be adopted. Lastly, companies with high levels of conservatism wish to avoid ambiguity

and prefer predictability. The difference within the risk levels of debt and equity, lead to

equity being chosen over debt, for companies in conservative societies.

Mastery is the second dimension and is closely linked to locus of control. In countries


through the use of aggressive policies. Therefore, the avoidance of covenants that are

attached to debt, could lead to a preference of equity over debt. Secondly, the avoidance

of the threat of bankruptcy could be avoided through the use of equity, due to a lack of

monitoring of cashflows being required, to ensure there is sufficient to pay the monthly

debt finance cost. Secondly, in countries where mastery is high there is evidence of

managers valuing individual success and independence. Therefore, the performance of

managers is closely monitored, with safer projects being chosen to avoid managers being

seen as failing. The impact on the capital structure leads to equity being preferred over

debt, to avoid companies being unable to meet their debt obligations and therefore avoid

the threat of bankruptcy.

One study (Li et al., 2013) that considers US companies find a positive and significant

relationship between uncertainty avoidance and corporate risk taking, while a negative

and significant relationship for the relationship between corporate risk taking and

uncertainty avoidance and harmony. The measures of risk taking include cash flow risk,

financial leverage and liquidity, the key determinant in this study is financial leverage.

The study identifies how important culture can be both directly and indirectly; through

making corporate decisions, and secondly through influencing countries to make these

decisions. The main objective for companies is the efficient allocation of capital to

ensure the company grows. If capital is not taken out for fear of the risk level, the

implication is the loss of profitable projects which is detrimental to the maximization of

the value of the company.

One study (Jalbert et al., 2007) surrounds the country in which CEOs receive their

degree, and the link with the level of compensation received. The results were

inconclusive and highlight instances whereby CEOs who did not have degrees were


al. (2007) considers the relationship between CEO nationality and compensation, there is some evidence of different capital structures operating within companies. The study has

been conducted in the US; and finds evidence that CEOs with different nationalities are

being compensated differently. When return on assets is considered, it is found to be

higher for CEOs born in Central and South America, Australian and New Zealand. The

relationship between CEOs nationality and a company’s capital structure was found to be

inconclusive, however it highlighted that CEOs with different birth places adopted a

different capital structure policy.

Jalbert et al. (2007) indicate a link between the age of the company and their capital

structure as opposed to the characteristics of the CEO. Baker and Hall (2004) identified a

link between CEO compensation and the size of the company, indicating that the

relationship maybe more complex. CEO Nationality Hypothesis

A combination of dimensions created through work conducted by Hoftstede (1980:2001)

and Schwartz (1994:2004) underpin the development of this hypothesis. One way to

consider culture is through measuring the nationality of the CEO. Few finance studies

have investigated the influence of culture on capital structure. Firstly, due to a lack of

disclosure, and secondly, due to the subjectivity of the topic.

The size of the companies may impede a significant relationship as larger companies are

able to mitigate against cultural issues (Li et al., 2013). The nature of culture and the

difficulty surrounding the implicit nature of some decisions could prevent a significant

relationship being identified; however, it is one of many CEO characteristics in this study


This study seeks to classify the CEOs of the FTSE 350 as either British or non-British,

and identify if there is a relationship between CEO Nationality and leverage levels.

CEOs whose nationality is high on the conservatism spectrum place a higher level of

importance on achieving harmonious relationships with all parties, avoiding bankruptcy,

and ensuring there is predictability within the company. Therefore, it is expected that

where the CEO is British there is a negative relationship with leverage. Whether national

culture is part of the capital structure puzzle is one aspect of this study, previously it has

remained as a fuzzy area within the field and has been elusive.

The hypothesis is:

H6: There is a negative relationship between CEO nationality and leverage.