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The Norm Theory of Capital Structure: International Evidence *
Author(s) -
Lam SweeSum,
Zhang Weina,
Lee Reginald Reagan Chua
Publication year - 2013
Publication title -
international review of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.489
H-Index - 18
eISSN - 1468-2443
pISSN - 1369-412X
DOI - 10.1111/j.1468-2443.2012.01154.x
Subject(s) - leverage (statistics) , capital structure , norm (philosophy) , economics , business , economic system , microeconomics , political science , mathematics , finance , statistics , debt , law
A kerlof proposes that the norms of decision makers can bridge the gap between N ew C lassical economic theories and conflicting empirical evidence. We apply his framework to cross‐country capital structure decision making and propose a norm theory of capital structure. Consistent with its predictions, we find that two principal components that represent the manager–subordinate relationship and the manager–environment relationship in a national culture are significantly and negatively related to the median leverage ratio at the country level. This study is among the first to provide a direct link between national culture and capital structure as made operational through managerial norms.