Do Peers and National Culture Matter for Capital Structure Decisions of Emerging Market Corporations?

Abstract

The study investigated how national culture acts as a mediating factor in the connection between peer effects and corporate capital structure in enterprises from emerging market nations. The methodology employs a two-stage least squares technique, incorporating fixed effects and an instrumental variable approach, to analyze the regression results obtained from ordinary least squares. The results indicate that the level of influence exerted by peers is significant for a firm when determining its own level of leverage. Furthermore, it has been noted that enterprises tend to adopt similar cultural traits as their peers, such as minimal power distance, high uncertainty avoidance, individualism and masculinity. Hence, managers may consider their peers’ decisions on leverage in the industry while making assessments about the appropriate level of leverage for their own company. Furthermore, as emerging economies often encounter perplexing and uncertain circumstances, obtaining reliable information from peers’ financial decisions can potentially mitigate the duration and cost associated with making this crucial decision.