Cultural Preferences and Firm Financing Choices

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The notion that the cultural background of individuals can affect their own financial decisions is well established in the economics and finance literature.

Given that individual characteristics of managers represent significant determinants of firm policies, in this paper, we examine whether the cultural origin of firm managers affects the financing decisions of the firms they run.

The empirical identification of the effect of management’s cultural traits on firm financing decisions is challenging because firms led by managers who belong to different cultural groups are usually headquartered in different countries that differ in terms of institutions, taxation, regulation, and macroeconomic conditions.

We overcome this empirical challenge by exploiting cultural differences in a sample of firms within a geographical area that shares a common regulatory, institutional, and macroeconomic setting: The autonomous province of South Tyrol in Northern Italy.

One of the richest areas in the European Union, South Tyrol is home to individuals who belong to two main cultural groups (Italian and Germanic) that differ significantly along several dimensions that can affect financing choices, such as social capital, trust, preference for formal or informal networks, and purely linguistic references to debt (for example the German word for debt, Schuld, means fault or guilt, in contrast to the Italian debito, which simply means to owe).

We look at a sample of about 4000 limited liability firms, and we proxy the cultural origin of firm managers with their names under the assumption that managers with a Germanic (Italian) name share a common language. Consistently with the above definition, our premise is that speaking the same language is a necessary condition for social interaction and for spreading cultural values.

In line with our predictions, we find significant differences with respect to financing decisions between firms managed by individuals of different cultural backgrounds. In particular, we find that:

• firms run by managers from the Italian cultural group are less capitalized than firms run by individuals from the Germanic group
• this difference is mostly driven by the higher use of trade credit from companies run by individuals from the Italian cultural group.
• Consistently, we observe that firms led by individuals of Italian origin are also willing to provide more credit to their customers.

Our main results highlight culture as one of the drivers of the variation in the recourse to informal finance in a multi-cultural setup.

In terms of policy implications, our results suggest that one-size-fits-all regulations aimed at incentivizing access to formal sources of finance could have heterogeneous effects depending on the preferences of different cultural groups affected by the regulation. Similarly, our study suggests that financial education should be structured differently according to the preferences of the different target cultural groups.

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Authors at the Department of Management

Mascia Bedendo – Full Professor

Academic disciplines: Corporate Finance

Teaching areas: Financial Markets

Research fields:  Culture and Finance; Green Finance; Credit Risk

Mascia Bedendo is a Full Professor of Finance in the Department of Management. Before joining the University of Bologna, she was a Professor of Finance at Audencia Business School, an Assistant Professor at Bocconi University, and a Postdoctoral fellow at Imperial College London. She held visiting positions at Collegio Carlo Alberto, Imperial College London, and Cass Business School.