Culture, agency costs, and governance: International evidence on capital structure

• Cultural measures impact firm-level debt use.
• Cultural measures impact firm-level debt-to-equity ratios.
• Cultural measures impact firm-level debt cost of capital.
• Cultural measures impact developed nations more than emerging nations.
• Good governance at the firm level largely offsets the effects of culture.

We examine social characteristics (individualism and risk aversion) and their interaction with firm governance and capital structure across the G20 countries from 1995 to 2009 using roughly 13,000 firms. We show that higher levels of individualism are associated with increased firm use of debt and lower cost of capital, whereas higher risk aversion has the opposite effects. Better firm-level governance substantially reduces these cultural effects, as does larger firm size, and less research-intensity at the firm. The results show that capital structure in emerging markets is considerably less affected by national culture relative to developed countries. To address endogeneity concerns, we show our results hold after using a propensity score matching procedure.