The Influence of National Culture on the Capital Structure of SMEs

Variations in entrepreneurial attitudes towards risk and control imply a link between the capital structure of SMEs and national culture. We investigate this unexplored relationship, using two of Schwartz’s latest cultural dimensions (Hierarchy and Embeddedness) and a large panel data sample from seven countries, covering the period 2006 to 2008. Our results show that Hierarchy is negatively related to debt levels not only for the full sample, but also across the sub-samples of micro, small and medium firms. This suggests that managers who operate in cultures where wealth, social power, and authority are important cultural values use less debt. Embeddedness is also negatively related to debt levels of small and medium firms. This suggests that relatively-smaller companies in cultures which inter alia value family security and self-discipline tend to use less debt. Further testing shows that national culture can affect long-term, short-term debt, and the choice between the two differently. While the results for Hierarchy show a consistent, negative relationship between this dimension and both types of debt, the results for Embeddedness vary depending on the size of the firm and the duration of the debt source. Our findings contribute to prior literature by providing empirical evidence of national culture’s influence on the capital structure of SMEs through the manager’s behaviour towards risk and control.