Managers' cultural origin and corporate response to an economic shock

The COVID-19 pandemic had unprecedented effects on businesses across the world.

This paper uses the unexpected COVID-19 shock to economic activity to analyze whether the cultural origin of the firms’ managers can help explain how companies respond to an exogenous shock.

Our research question builds upon a significant stream of literature that shows that individuals belonging to different cultures display essential differences in their financial decisions and economic outcomes. However, identifying the role of culture is often problematic because firms with managers of various cultural groups are usually headquartered in different countries that vary in terms of policies and regulatory measures adopted to face the pandemic. The project overcame this problem by exploiting cultural differences in a sample of firms from the Autonomous Province of South Tyrol, which hosts two main cultural groups: Germanic and Italian. From a linguistic perspective, weak (strong) future-time reference languages such as German (Italian) have been associated with a stronger long-term (short-term) oriented behavior. These differences between the two cultural groups helped to formulate a range of hypotheses on their relative behavior in response to the pandemic. Overall, this empirical setup allowed us to identify the effects of cultural origin on firm responses and firm resilience while keeping constant the institutional setup, economic conditions, regulations, infrastructures, markets, and several firm and industry characteristics.

Our data consist of all non-financial limited liability firms headquartered in the South Tyrol province with balance sheet data available for two years before the pandemic and the pandemic year 2020.

Firms were classified into different cultural groups based on the well-established methodology of classifying origin by the managers’ names. Our findings from a battery of difference-in-differences models uncovered significant cultural differences in firm responses to the COVID-19 shock.

First, consistently with a dislike of individuals of Germanic origin towards debt financing, we find that firms of Italian origin were more likely to resort to government-guaranteed loans during the pandemic, while firms of Germanic origin recurred more often to recapitalization.

Second, in line with different time preferences across the two cultural groups, we find that firms with managers of Italian origin strengthened their position in current assets but invested less in fixed assets and had lower capital expenditures compared to the Germanic group.

Third, we find that asset growth rates for firms of Italian origin were lower relative to firms of Germanic origin.

Overall, our results support the hypothesis that Germanic culture is more long-term oriented than Italian culture and that such cultural traits can affect real economic outcomes. While the results are specific to the bicultural context under study, they shed light on the role of culture in explaining cross-country differences in responses to economic shocks.

Our paper contributes, first and foremost to the literature analyzing the impact of culture on firm policies. Existing contributions associate culture with corporate risk taking, corporate governance, firm performance, cash holdings and firm financing, but surprisingly little work has been done on the effect of culture on the corporate response to a crisis.

Additionally, we contribute to the literature on the impact of Covid-19 on firms. Our findings advance our knowledge of the importance of cultural heritage along several dimensions. Understanding firms’ responses and vulnerability to shocks is critical and topical not only because of the Covid-19 pandemic but also in light of the severe economic shocks that have occurred in recent years (e.g., the global financial crisis, the European sovereign debt crisis and the energy crisis following the war in Ukraine), and their heterogeneous effects observed across firms in different countries. This cross-country variation is usually ascribed to differences in institutions and regulations, contract enforcement, and business practices.

Our findings shed light on the role that the cultural heritage of firm managers plays in explaining how companies react to a crisis while holding everything else equal. In this respect, besides contributing to the academic literature on culture and finance, our research can help policymakers understand why different cultural groups respond differently to shocks. Similarly, our findings may help inform policymakers on what measures could be appropriate to mitigate the effects of cultural differences in times of crisis. As such, we expect our research to be useful for the design of policies that address firm vulnerabilities to shocks, both from an ex-ante point of view (prevention of shocks) and an ex-post point of view (response to shocks), in particular for institutions that operate in multi-cultural environments.

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Authors at the Department of Management

Mascia Bedendo – Professor of Corporate Finance

Academic disciplines: Corporate finance

Teaching areas: Asset Management, Finance

Research fields:  Credit risk, firm financing, green finance

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. She holds a Ph.D. in Finance from the University of Warwick. Her research has been published in high-impact journals such as the Journal of Financial and Quantitative Analysis, the Journal of Money, Credit and Banking, Journal of Corporate Finance, and it is mostly focused on firm financing and credit risk. Mascia has gained international teaching experience at all levels (undergraduate, graduate, Ph.D., executive).