SSRN Id1260746

National Culture and Corporate Governance
by
Wolfgang Breuer* and Astrid Juliane Salzmann+
Abstract. In a series of cross-country comparisons, we show that national culture is statistically signi-
ficant in differentiating countries with different corporate governance systems. Using the Schwartz
cultural value model and data on corporate governance systems, we analyze the impact of national
culture on six dimensions of corporate governance. Countries that have stronger emphasis on the
dimensions of Embeddedness, Egalitarianism, and Harmony are more likely to have bank-based sys-
tems, while countries with a stronger emphasis on Autonomy, Hierarchy, and Mastery tend to have
market-based systems. The findings suggest several implications for the ongoing debate on conver-
gence and divergence of corporate governance systems and policy reforms regarding financial crises.
JEL classification code: A13, G10, G30, N20, Z13

Keywords: corporate governance, national culture
*
Prof. Dr. Wolfgang Breuer, RWTH Aachen University, Lehrstuhl fr Betriebswirtschaftslehre, insb.
Betriebliche Finanzwirtschaft, Templergraben 64, 52056 Aachen, Germany. Fon: +49 241 8093539,
Fax: +49 241 8092163, eMail: wolfgang.breuer@bfw.rwth-aachen.de.
+
Dr. Astrid Juliane Salzmann, RWTH Aachen University, Lehrstuhl fr Betriebswirtschaftslehre, insb.
Betriebliche Finanzwirtschaft, Templergraben 64, 52056 Aachen, Germany. Fon: +49 241 8093533,
Fax: +49 241 8092163, eMail: astrid.salzmann@bfw.rwth-aachen.de.
We would like to thank Bob Chirinko, Julian Holler, Dusan Isakov, Jens Iversen, Barbara Petracci,
Robert Durand, and several anonymous conference referees for helpful comments. We are also
grateful for suggestions from participants at the Annual Meeting of the Midwest Finance Association
in Chicago, March 2009, the Conference of the Swiss Society for Financial Market Research in Ge-
neva, April 2009, the FMA European Conference in Turin, June 2009, the INFINITY Conference on
International Finance in Dublin, June 2009, the FMA Asian Conference in Singapore, July 2010, and
the Australasian Finance and Banking Conference in Sydney, December 2010. Financial support by
the Deutsche Forschungsgemeinschaft (DFG) is gratefully acknowledged.
Electroniccopy
Electronic copyavailable
available at:
at: http://ssrn.com/abstract=1260746
http://ssrn.com/abstract=1260746
National Culture and Corporate Governance
Abstract. In a series of cross-country comparisons, we show that national culture is statistically signi-
ficant in differentiating countries with different corporate governance systems. Using the Schwartz
cultural value model and data on corporate governance systems, we analyze the impact of national
culture on six dimensions of corporate governance. Countries that have stronger emphasis on the
dimensions of Embeddedness, Egalitarianism, and Harmony are more likely to have bank-based sys-
tems, while countries with a stronger emphasis on Autonomy, Hierarchy, and Mastery tend to have
market-based systems. The findings suggest several implications for the ongoing debate on conver-
gence and divergence of corporate governance systems and policy reforms regarding financial crises.
JEL classification code: A13, G10, G30, N20, Z13

Keywords: corporate governance, national culture
Electroniccopy
Electronic copyavailable
available at:
at: http://ssrn.com/abstract=1260746
http://ssrn.com/abstract=1260746
1 Introduction
Corporate governance deals with the means in which suppliers of finance to corporations ensure
adequate returns on their investment and that their funds are not expropriated. Corporate gover-
nance is traditionally studied within the framework of agency theory developed by Jensen and Meck-
ling (1976), viewing the corporation as a nexus of contracts between principals and agents. The
foundation of the agency problem lies in the separation of ownership and control (or the separation
of finance and management), originally motivated by the seminal study of Berle and Means (1932).
As interests of principals and agents usually do not coincide, various mechanisms have been devel-
oped to align them. Conventionally, the financiers and the manager sign a contract that determines
the managerial functions and duties and the division of returns. Ideally, they would sign a complete
contract, but practically, complete contracts are hardly feasible. The solution in order to align inter-
ests of principals and agents lies in incentive contracts (Shleifer and Vishney, 1997).
There exists a wide range of specific contractual mechanisms to address the agency problem and
recent surveys of corporate governance have clearly demonstrated that corporate governance me-
chanisms vary significantly among nations (Shleifer and Vishney, 1997). Doidge et al. (2007) show
that country characteristics have a significant impact on country-level measures of governance, ex-
plaining much more of the variance in corporate governance (ranging from 39 % to 73 %) than ob-
servable firm characteristics (ranging from 4 % to 22 %). Even though many other studies investigat-
ing cross-country differences of financial issues found country to be significant, it is still difficult to
explain the reasons behind the country effects (Sekely and Collins, 1988). Economies have converged
in a number of fields during the past, but corporate governance structures have remained different.
What explains these differences? And should they be expected to persist or disappear? This study
1
proposes culture as a key driver for the particular design of corporate governance systems and de-
termines sources of national culture that can help to answer these questions.
Research papers on different areas of business studies (for example in accounting and organizational
studies) have already documented the remarkable impact of culture and have shown that culture can
account for country-specific differences. Due to its nature of common knowledge of a society, culture
acts as a constraint which guides peoples sentiments and behavior. This lowers the costs to establish
and preserve institutions that are compatible with prevailing cultural values (Licht et al., 2005). As
corporate governance is basically the outcome of interactions among stakeholders, it needs to be
conceptualized in terms of its embeddedness in different social contexts (Granovetter, 1985). In or-
der to function properly, the general and the more specific institutions in a society need to be con-
ceptually consistent (Roland, 2004). Therefore, we must restrain from the undersocialized view of
the corporation and take a contextual approach. Our approach enables us to recognize the important
role national contexts have for corporate governance through differences in cultural characteristics.
Differences in culture might all have impeded, and might continue to impede, convergence or diver-
gence of corporate governance structures. American culture, for example, opposes hierarchy and
centralized authority more than Japanese culture, German people are proud of their national code-
termination, Italian family firm owners may get special value from a longstanding family-owned busi-
ness, while an American family might prefer to cash the company earlier and engage into politics
(Bebschuk and Roe, 1999). The sources of national culture that we identify can explain why econo-
mies still differ in important patterns of corporate governance despite the powerful forces in an
increasingly global marketplace pressing towards convergence and also indicate that some impor-
tant differences might even persist (Licht, 2001).
2
The argument that culture influences the corporate governance system of a country is based on Wil-
liamsons (2000) institutional model. Williamson (2000) distinguishes four levels of social institutions:
informal institutions such as norms, customs, and cultural values (Level I), the formal institutional
environment such as law and property rights (Level II), corporate governance structures (Level III),
and actual firm practices (Level IV). In this framework, culture at the top level affects institutions
which again affect corporate governance.
A recent stream of research takes on this argument and addresses the relationships between dimen-
sions of national culture and characteristics of corporate governance systems. Licht et al. (2005) find
empirical support for the impact of culture on the protection of minority shareholders. De Jong and
Semenov (2006) identify several significant relationships between corporate control, the ownership
structure, and the protection of minority shareholders and the cultural dimensions of Hofstede. Li
and Harrison (2008) document a significant impact of national culture using the Hofstede model on
the structure of corporate boards. Haxhi and van Ees (2010) argue that culture is crucial in explaining
the worldwide diffusion of corporate governance practices.
Awareness among policy-makers, theorists, and practitioners of the relevance of national culture to
corporate governance is obviously growing (Guiso et al., 2006). Our study complements previous
work by offering a more comprehensive approach with six distinct corporate governance indicators
and using a larger dataset across a wide range of countries. Our research focuses on corporate con-
trol, investors objectives, ownership structure, protection of minority shareholders, corporate
boards, and takeover activity as main attributes of corporate governance systems and their devel-
opments in relation to the Schwartz cultural dimensions of Embeddedness, Autonomy, Hierarchy,
Egalitarianism, Mastery, and Harmony. We outline a general theory on the links between value types
postulated by the concept of national culture and central issues dealt with by every corporate gover-
3
nance system. As the main contribution of this paper, we show that countries with a strong emphasis
on the cultural dimensions of Embeddedness, Egalitarianism, and Harmony tend to have a bank-
based corporate governance system, whereas countries with a strong emphasis on the cultural di-
mensions of Autonomy, Hierarchy, and Mastery tend towards a market-based system.
The remainder of the paper is structured as follows. Section 2 introduces the theoretical background
and develops the research hypotheses. Section 3 presents the dataset and Section 4 constitutes the
empirical analysis. Section 5 discusses the results and Section 6 refers to some implications. Section 7
concludes.
2 Theoretical background
The following part deals with the two basic concepts of this study: national culture and corporate
governance. After a short introduction to the notion of culture we continue with an outline of the
Schwartz model. Thereafter, we discuss basic literature on corporate governance and relate it to
cultural dimensions. The analysis culminates in the derivation of six hypotheses concerning the main
characteristics of corporate governance.
2.1 The concept of national culture
Culture is a very vague concept with manifold definitions (Kroeber and Kluckhohn, 1952). A common
definition was given by the Dutch researcher Geert Hofstede (1984, p. 82):
Culture is the collective programming of the mind which distinguishes the members of one group or
society from those of another. Culture consists of the patterns of thinking that parents transfer to
their children, teachers to their students, friends to their friends, leaders to their followers, and fol-
lowers to their leaders. Culture is reflected in the meanings people attach to various aspects of life;
their way of looking at the world and their role in it; in their values, that is, in what they consider as
good and evil; in their collective beliefs, what they consider as true and as false; in their artistic
expressions, what they consider as beautiful and as ugly.
4
As it is illustrated in this definition, values must be established as the most fundamental element of
culture. Values are to be understood as the central characteristics of a culture and can be employed
to compare different cultures. This basic status of values is reflected in the functional chain of cul-
ture, from values across attitudes towards behavior. Values shape attitudes which again form the
behavior of people. Accordingly, as cultural values take roots among individual members of a society,
they shape social institutions and the general social environment.
Many scientists developed different frameworks to describe cultural paradigms, and to date there
exist several alternative cultural models: the Hofstede (2001) cultural dimensions, the Schwartz
(1994) culture-level analysis, the GLOBE study (House et al., 2004), the survey of cultural values
(Smith et al., 2002), and the World Values Survey (Ingelhart et al., 1998). Normally, such a framework
consists of several cultural dimensions which can be used to characterize and categorize countries
and cultures, respectively. For each dimension, the two extreme values are specified and the particu-
lar countries/cultures are arranged in between. As value types can take numerical values, they may
be used to derive statistically testable hypotheses about corporate governance systems.
Over the last decades, there has been considerable debate over which model to use. Following re-
cent literature in international business (see, for example Shao et al., 2010, Chui et al., 2002), we
capture national culture using the Schwartz (1994) cultural theory. Although Hofstedes framework is
still most widely used for the description of cultural differences in international business, Schwartzs
model overcomes some difficulties of Hofstedes approach: It is based on a careful theoretical elabo-
ration and then empirically validated, it offers a more comprehensive set of value dimensions, it uses
more recent data, it was obtained from more diverse regions including socialist countries, and it has
been tested with two matched samples (Ng et al., 2007). After having studied the underlying cultural
value concept comprehensively, Schwartz (1994, 1999) conducted his studies in the years from 1988
5
to 1992 and took samples from 38 countries in 30 different languages. Since then the surveys have
been continued and, currently, data on cultural dimensions are available for 73 countries.
Schwartz (2004) derived his model from three basic problems that confront all societies: the nature
of the relation between the person and the group, the securing of responsible behavior to preserve
the social fabric, and the management of relationships between the natural and social world. The
Schwartz cultural model specifies three bipolar dimensions that represent alternative solutions to
these problems: Embeddedness versus Autonomy, Hierarchy versus Egalitarianism, and Mastery
versus Harmony.
Embeddedness emphasizes the maintenance of the status quo and relies on values like SOCIAL ORDER,
RESPECT FOR TRADITION, RECIPROCATION OF FAVORS, and WISDOM.
Autonomy relates to the desirability of individuals independently pursuing their own ideas and draws
on values like CREATIVITY, SELF-INDULGENCE, FREEDOM, and VARIED LIFE.
Hierarchy corresponds to the legitimacy of an unequal distribution of power and applies to the values
SOCIAL POWER, AUTHORITY, WEALTH, and HUMBLENESS.
Egalitarianism relates to sharing basic interests and showing concern for everyones welfare and
bears on values like EQUALITY, SOCIAL JUSTICE, RESPONSIBILITY, and HELPFULNESS.
Mastery supports the idea of getting ahead through active self-assertion and refers to values like
AMBITION, SUCCESS, and INFLUENCE.
Harmony points to accepting the world as it is and rests on values like UNITY WITH NATURE, PROTECTING
THE ENVIRONMENT, and A WORLD IN PEACE.
An emphasis on the cultural type at one pole of a dimension typically accompanies a de-emphasis on
the polar type. Altogether, the model encompasses seven cultural dimensions, as the dimension of
Autonomy divides into Affective and Intellectual Autonomy. These dimensions were constructed out
of 45 basic value types, as indicated in Table 1. In the following, with respect to our hypotheses, we
will not distinguish between the two variants of Autonomy.
>>> Insert Table 1 about here <<<
6
2.2 National culture and corporate governance
Culture induces actions compatible with its values through its impact on organizational policies and
on the values of individual decision-makers. Cultural values constitute a convention of common
tastes for certain interpersonal relations and institutions, and, as a result, may influence the choice of
particular corporate governance structures. In the long-run, the content of corporate governance
structures should be compatible with and partly reflect the prevailing cultural orientations in a soci-
ety (Roland, 2004).
Most comparisons identify and contrast two general systems of corporate governance: one, asso-
ciated with the United States and the United Kingdom, which is characterized as a market-based
corporate governance system, and the other, associated with Germany and Japan, which is characte-
rized as a bank-based corporate governance system (Aguilera and Jackson, 2003). Table 2 provides
the basis for analyzing the impact of the particular cultural dimensions on corporate governance
systems. In order to offer a comprehensive approach to corporate governance systems, it is impor-
tant to study national differences in corporate governance mechanisms along salient dimensions. We
first identify key dimensions that describe the variations in corporate governance systems, namely
corporate control, investors objectives, ownership structure, protection of minority shareholders,
corporate boards, and takeover activity (Guilln, 2000). The bank-based corporate governance sys-
tem can be stylized in terms of an insider system, strategic investors objectives, complex ownership
structures, a weak protection of minority shareholders, a crucial role of corporate boards, and low
takeover activity, and the market-based corporate governance system in terms of an outsider sys-
tem, financial investors objectives, transparent ownership structures, a strong protection of minority
shareholders, a limited role of corporate boards, and high takeover activity. As our approach is
broadly based and the six dimensions constitute essential features of a corporate governance sys-
7
tem, they might not be entirely mutually exclusive. However, in order to offer a really comprehensive
approach, overlap might be accepted, though we try to construct the dimensions as disjunctive as
possible.
In the following, we demonstrate how a particular set of cultural values may affect the choice of spe-
cific approaches to corporate governance in a society. We only focus on those cultural dimensions
that seem most influential on a certain dimension of corporate governance. We examine the rela-
tionship between culture and corporate governance verbally and summarize them in hypotheses,
analogously to the proceedings in Licht et al. (2005).
2.2.1 Corporate control
The agency problem deals with the difficulties of financiers in ensuring that their funds are not ex-
propriated or wasted on unattractive projects. The problem is tackled by incentive contracts which
vary in their specific contractual mechanisms (Shleifer and Vishney, 1997).
In the bank-based corporate governance system, control is predominantly exercised by bank rela-
tionships and miscellaneous stakeholders, and thus the system is referred to as an insider system.
According to Schmidt et al. (2001), there exist numerous insiders with special information and in-
fluential capabilities. Tyrell and Schmidt (2001) note that a bank-based system relies on stability, as it
is grounded on implicit contracts with a long-term orientation. Pursuant Franks and Mayer (2001),
the existence of private information involves the risk of exploiting information for private benefits.
Furthermore, Franks and Mayer (1995) observe that ownership patterns reflect a tradeoff of risk and
control, whereas the bank-based system relies on high control and low risk. In the market-based
corporate governance system, control is exercised via market mechanisms, and thus the system is
8
called an outsider system. For Schmidt et al. (2001), these mechanisms consist mainly of proxy votes,
mergers, and acquisitions. In compliance with Tyrell and Schmidt (2001), the market-based system is
based on flexibility; relationships are governed by explicit contracts and are generally short-term.
However, the availability of public information leads to free-rider problems. This is again demon-
strated in the analysis of ownership patterns by Franks and Mayer (1995), who detect high risk and
low control in the market-based system.
Countries with a strong emphasis on the cultural dimension of Embeddedness should tend to have a
bank-based corporate governance system. Embeddedness coincides with values like SOCIAL ORDER,
RESPECT FOR TRADITION, RECIPROCATION OF FAVORS, and HONORING OF PARENTS/ELDERS, which relates to the
existence of privileged insiders. There exist numerous stakeholders in an insider system that have a
very strong position when it comes to managerial decisions. A strong emphasis on the cultural di-
mension of Autonomy militates in favor of the market-based corporate governance system. Autono-
my draws on values like FREEDOM, VARIED LIFE, and CREATIVITY, which is reflected in the flexibility of the
market based system. Shareholders do not want to commit themselves to certain responsibilities and
preserve their freedom regarding the lockup of capital. Countries with a low emphasis on the men-
tioned cultural dimensions should demonstrate reverse characteristics. Thus, the hypothesis to be
tested is:
H1: In countries with

a) high emphasis on the cultural dimension of Embeddedness,
b) low emphasis on the cultural dimension of Autonomy,
corporate control is exercised by bank relationships and various stakeholders (insider system), in
countries with
a) low emphasis on the cultural dimension of Embeddedness,
b) high emphasis on the cultural dimension of Autonomy,
corporate control is exercised externally via market mechanisms (outsider system).
9
2.2.2 Investors objectives
There may exist different kinds of investors (for example banks, pension funds, individuals, industrial
companies, families) which might possess not only different identities, but also different interests,
time horizons and strategies (Aguilera and Jackson, 2003).
In the bank-based corporate governance system, investors do not pursue immediate financial objec-
tives, and the system is ascribed as control-based. Hackethal and Schmidt (2000) point out that prior-
ity is given to strategic interests, which is the case for the owner family or long-term business part-
ners. According to Aguilera and Jackson (2003), commitment is very high and control is exercised
directly through voice. In the market-based corporate governance system, investors objectives are
solely financial, and the system is referred to as liquidity-based. Investments are motivated by the
prospect of a positive return, and thus Hackethal and Schmidt (2000) remark that the maximization
of the market value of a share and its dividend are of main interest. Following Aguilera and Jackson
(2003), liquid shareholders prefer the ability to exit to the control through voice.
Countries with a strong emphasis on the cultural dimension of Harmony should tend towards a bank-
based corporate governance system. Harmony is produced by the value A WORLD IN PEACE, which sup-
ports the idea of direct influence to secure strategic objectives. Investors have close relationships to
corporations and engage heavily in them. A strong emphasis on the cultural dimension of Autonomy
suits a market-based corporate governance system. Autonomy rests on FREEDOM and SELF-INDULGENCE,
which correlates with liquidity-orientation and the ability to exit. Investors pursue their own goals
which might vary at times, so that they refrain from entering commitments by pursuing financial
objectives. Again, countries with a low emphasis on the addressed cultural dimensions should exhibit
characteristics of the opposite system. The hypothesis to be verified is:
10
a) high emphasis on the cultural dimension of Harmony,
b) low emphasis on the cultural dimension of Autonomy,
investors pursue strategic objectives (control orientation), in countries with
a) low emphasis on the cultural dimension of Harmony,
b) high emphasis on the cultural dimension of Autonomy,
investors pursue financial objectives (liquidity orientation).
2.2.3 Ownership structure
The structure of corporate ownership is essentially determined by the degree of ownership concen-
tration. Large investors represent their own interests which need not coincide with the interests of
other investors or stakeholders (Prowse, 1994).
In the bank-based corporate governance system, ownership structures are rather complex and cha-
racterized by cross-shareholdings. The exertion of control through voice results in increasing owner-
ship concentration (Aguilera and Jackson, 2003). Franks and Mayer (1995) remark that bank-based
systems have small quoted sectors, and companies typically have at least one major strategic
shareholder owning more than 25 % of the equity. On the other hand, ownership structures of the
market-based corporate governance system are transparent and not very complex. Aguilera and
Jackson (2003) argue that high liquidity and the ability to exit favor fragmented ownership. Franks
and Mayer (1995) also confirm the existence of large quoted sectors in the market-based system
with stocks being widely held by institutional/individual shareholders without strategic interests.
A strong emphasis on the cultural dimensions of Egalitarianism matches a bank-based corporate go-
vernance system, as RESPONSIBILITY and HELPFULNESS are in line with complex ownership structures,
where many interests are reconciled. Investors carry clear responsibilities so that several interests
need to be settled. Countries with a strong emphasis on the cultural dimension of Hierarchy should
tend towards a market-based corporate governance system. WEALTH and AUTHORITY, which corres-
11
pond to the dimension of Hierarchy, are in accordance with liquidity orientation. This is the case for
institutional/individual shareholders, which pursue financial objectives in an exceptionally self-
determined manner. This yields the following hypothesis:

a) high emphasis on the cultural dimension of Egalitarianism,
b) low emphasis on the cultural dimension of Hierarchy,
ownership structures are rather complex and there is a strong incidence of cross-shareholdings, in
countries with
a) low emphasis on the cultural dimension of Egalitarianism,
b) high emphasis on the cultural dimension of Hierarchy,
ownership structures are transparent and not very complex.
2.2.4 Protection of minority shareholders
The protection of minority shareholders deals with the representation of minority shareholders
rights in a corporation. Countries with pronounced investor protection typically exhibit more frag-
mented control of firms than do countries with poor investor protection (La Porta et al., 2000).
Corresponding to the ownership structure, the protection of minority shareholders is very weak in
the bank-based corporate governance system. Due to the superiority of shareholders with large
stakes, interests of minority shareholders are hardly considered (Berkovitch and Israel, 1999). How-
ever, the protection of minority shareholders is very strong in the market-based corporate gover-
nance system. Despite moderate influence capabilities, property rights predominantly protect insti-
tutional/individual shareholders (Aguilera and Jackson, 2003).
The values of the cultural dimensions should behave similarly to the ones above. A strong emphasis
on the cultural dimension of Harmony is, with reference to the values A WORLD IN PEACE and UNITY WITH
NATURE, again in line with the bank-based corporate governance system, where the situation is ac-
cepted as it is. Because of the complex ownership structures, control is exercised internally and in-
12
cremental by powerful insiders. Referring to its generating value EQUALITY, a strong emphasis on the
cultural dimensions of Egalitarianism corresponds to the market-based system, where all sharehold-
ers have equal rights. The power structure is well balanced and evenly distributed throughout all
shareholders. These considerations make for the following hypothesis:

b) low emphasis on the cultural dimension of Egalitarianism,
protection of minority shareholders is very weak, in countries with
b) high emphasis on the cultural dimension of Egalitarianism,
protection of minority shareholders is very strong.
2.2.5 Corporate Boards
The board of directors is responsible to carry out the monitoring function on behalf of the sharehold-
ers. It has, at least theoretically, the power to hire and fire the management, set their compensation,
and impede any major investments (Prowse, 1994).
Corporate boards play a very crucial role in the bank-based corporate governance system, which is
reflected in their dual structure as a two-tier system. Bhner et al. (1998) point out that high man-
agement control can be obtained by the strong representation of outsiders, namely non-
management employees and banks, in the supervisory board. In the market-based corporate gover-
nance system, the role of corporate boards is rather limited, as it is virtually a substructure of the
management. Fischer and Rudolph (2000) remark that incentives aligning managements and share-
holders interests can be established via stock options or the market for corporate control.
A strong emphasis on the cultural dimensions of Harmony and Embeddedness militates in favor of a
bank-based corporate governance system. Harmony rests on UNITY WITH NATURE and Embeddedness
on SOCIAL ORDER, which is in line with a strong corporate board that acts in the interest of outsiders.
13
Outsiders are strongly represented in the corporate board so that many interests need to be united.
This adds up in the hypothesis:

b) high emphasis on the cultural dimension of Embeddedness,
corporate boards play a crucial role, in countries with
b) low emphasis on the cultural dimension of Embeddedness,
the role of corporate boards is rather limited.
2.2.6 Takeover activity
Takeover activity is widely recognized as a potentially important mechanism by which market forces
prohibit management misbehavior. If firms do not maximize profits, investors can gain by purchasing
the firm and changing the policy to a value-maximizing one (Prowse, 1994). However, takeovers are
an extremely vulnerable mechanism, since they are opposed by managerial lobbies and cross-
ownership which has developed as an anti-takeover device (La Porta et al., 1999). Moreover, the
existence of a market for corporate control not only induces beneficial effects. It might also aggra-
vate agency problems and trigger inefficient actions.
In the bank-based corporate governance system, takeover activity is very low. Bhner et al. (1998)
ascribe this to the impediment of the market for corporate control by strong regulation, proxy votes,
and voting right restrictions. This confers more power to banks, family owners, and states, which will
be able to inhibit undesirable takeovers. The level of takeover activity is comparably high in the mar-
ket-based corporate governance system. According to Franks and Mayer (1998), takeovers are re-
garded as a central function of the stock market, because they secure effective management and
induce a convergence of the interests of management and shareholders.
14
A strong emphasis on the cultural dimension of Harmony corresponds to a bank-based system. Har-
mony rests on A WORLD IN PEACE, which is in line with low takeover activity. Confrontations are avoided
and takeovers thus prevented. A strong emphasis on the cultural dimension of Mastery coincides
with a market-based corporate governance system. Mastery is based on values like AMBITION and
INFLUENCE, which match the idea of influence emanating from takeovers. If management mistakes
occur, responsibility is assumed by the market for corporate control so that takeover processes might
be initiated. This produces the following hypothesis:

b) low emphasis on the cultural dimension of Mastery,
takeover activity is very low, in countries with
b) high emphasis on the cultural dimension of Mastery,
takeover activity is very high.
3 Data
The preceding subsection exposes how culture can be systematically related to major issues of cor-
porate governance. The remaining parts of the paper present empirical support for the hypotheses
H1 to H6, starting with a description of data on national culture and data on the dimensions of cor-
porate governance in this section.
3.1 Data on national culture
Data describing culture using the Schwartz framework have been collected continuously and are
currently available for 73 countries from the Israel Social Science Data Center at the Hebrew Univer-
sity of Jerusalem. Using the Schwartz Value Survey, people in each country are asked to judge the 45
basic values according to their importance as Guiding Principles in Her/His Life. The response op-
tions range from 7 (of supreme importance) to 1 (opposed to my values). For each country, the
15
values of the different cultural dimensions are then calculated out of these results. Table 3 presents
data for a selection of 18 representative countries exemplarily. Our empirical analysis, however, re-
lies on the data of all 73 countries.
3.2 Data on corporate governance
The data used for measuring the dimensions of corporate governance are from various sources (see
Table 4) and therefore are not always available for all countries. Widely held from Stulz (2005) meas-
ures the dimension of corporate control. Widely held is the fraction of firms with no controlling
shareholder who holds more than 10 % of the voting rights. Thus, a bank-based system with a high
number of insiders would have lower values. Investors objectives are measured by close_vw from
Stulz (2005), which is the value-weighted average fraction of firm stock market capitalization held by
insiders. Strategic objectives are indicated by high values, and financial objectives are indicated by
low values. OwnerConc represents the average percentage of common shares owned by the top
three shareholders in the ten largest non-financial, privately-owned domestic firms in a given coun-
try. The data can be found in La Porta et al. (2006). Bank-based corporate governance systems would
have high values, market-based systems low values. A good measure for the protection of minority
shareholders can be found in Lopez-Claros et al. (2006). ProtMin shows how firms in different coun-
tries judge investors protection on a scale from 1 (not protected by law) to 7 (protected by law).
Lopez-Claros et al. (2006) also investigate the role of corporate boards. EffBoards displays results
between 1 (management has little accountability) and 7 (investors and boards exert strong supervi-
sion), so that bank-based corporate governance systems should have high values and market-based
systems low values. The level of takeover activity is measured by M&AValue, the M&A transaction
value to GDP from World Economic Forum (2008).
16
Table 5 shows some descriptive statistics of data on national culture and corporate governance.
3.3 Control variables
While we focus on cultural determinants, we also account for other reasons, not directly rooted in
national culture, why corporate governance structures might vary among countries and continue to
do so over time. Therefore, we include a set of country-specific control variables. We control for the
economic, legal, macroeconomic, political, and institutional development, which are suggested in the
literature as potential factors influencing the corporate governance system of a country. The data we
use are specified in Table 4.
The level of economic development provides information about the overall institutional quality of a
country. In general, well developed countries have better information, communication, legal and
administrative infrastructure, which affect the functioning of various corporate governance mechan-
isms. To control for the impact of the overall economic development, we include the logarithm of
real GDP per capita.
The legal system is without doubt an essential parameter for the corporate governance system. De-
pending on how strong the legal framework is, corporate governance mechanisms might act as subs-
titutes. Shleifer and Vishney (1997) find that corporate governance systems are less effective when
they lack the necessary legal protection. To account for the legal system we include an indicator vari-
able that takes the value 1 for common law countries and 0 otherwise. Common law countries usual-
ly protect shareholder rights more than other countries (La Porta et al., 1998).
17
The macroeconomic conditions might also influence corporate governance systems. Inflation nur-
tures financial underdevelopment, whereas openness to international trade fosters financial activi-
ties in general. To account for macroeconomic policies, we include measures of inflation as the log
difference of consumer price index and trade openness as the sum of real exports and imports as
share of real GDP. Since both variables are highly negatively correlated, we include the principal
component of inflation and trade openness as a measure for macroeconomic conditions in the re-
gressions.
The political climate is of severe importance for the corporate governance system of a country. A
political environment with high political risk, instability and corruption threatens financial develop-
ment. Besides, Guilln (2000) observes that corporate governance mechanisms are shaped by politi-
cal interests and can be altered by the political process. To explore the impact of the political climate,
we use the number of revolutions, the number of assassinations, and a measure of corruption in a
country. To minimize the correlation problem of these variables, we calculate their principal compo-
nent and include it in the regressions.
The institutional development plays another considerable role in shaping the corporate governance
system of a country. John and Senbet (1998) find that designing corporate governance structures
should be done in conjunction with designing institutions. La Porta et al. (1999) argue that frame-
works like the legal system do not operate by themselves but depend heavily on their enforcement.
To capture the institutional development of a country, we use the institutions index from Kaufmann
et al. (2006). It is a broad measure of institutional quality based on voice and accountability, political
stability and absence of violence, government effectiveness, light regulatory burden, rule of law, and
freedom from graft.
18
4 Regression results
Table 4 displays that the variables have different directions regarding their orientation towards a
bank-based or market-based corporate governance system. For the following empirical analysis, we
therefore multiply the variables OwnerConc, Close_vw and EffBoards with 1, so that lower values of
the variables always stand for the bank-based system, whereas higher values of the variables indicate
the market-based system. Table 6 presents the correlations between cultural dimensions, dimen-
sions of corporate governance, and control variables.
For the empirical analysis, we estimate multivariate regression models of each dimension of corpo-
rate governance on the dimensions of national culture. In consideration of the bipolarity of the cul-
tural dimensions, we never include two bipolar dimensions at the same time. Due to the high corre-
lations between the cultural variables, this would cause severe problems of multicollinearity. Follow-
ing the procedure employed by Kwok and Tadesse (2006), we obtain two models of the form

(1)

(2)
where is the variable representing the corporate governance dimension studied
! 1, , 6&, and is a set of country-specific control variables representing the economic, legal,
macroeconomic, political and institutional development. We standardize both the dependent and
independent variables (the mean is set to zero and the standard deviation to one) so that the coeffi-
cient estimates can be directly compared within and across regressions. Table 7 presents the regres-
sion results.
19
We find entire support for H1. The cultural dimension of Embeddedness has a negative impact on
corporate control: Countries with a high emphasis on Embeddedness tend to have an insider system,
and countries with a low emphasis on Embeddedness tend to have an outsider system. The cultural
dimension of Autonomy has a positive impact on corporate control, which means that countries with
a low emphasis on Autonomy tend to have an insider system, and countries with a high emphasis on
Autonomy tend to have an outsider system. The relationships are all highly significant.
Since both dependent and independent variables have been standardized for our regressions, the
corporate governance estimates are easy to interpret in economic terms. The original variable Widely
held (i.e. before standardization) has a mean of 0.22 and a standard deviation of 0.25, and in the last
column Embeddedness has a coefficient estimate of 0.41. This estimate implies that, all else equal,
a one-standard-deviation increase in Embeddedness would induce a 0.41 0.25 = 0.1025 decrease in
the Widely held measure. In percentage terms, relative to the mean of Widely held, this corresponds
to about a 47 % decrease in Widely held, which is economically significant. Autonomy has a coeffi-
cient estimate of 1.15, which implies that a one-standard-deviation increase in Autonomy would
induce a 1.15 0.25 = 0.2875 increase in the Widely held measure. In percentage terms, relative to
the mean of Widely held, this corresponds to about a 131 % increase in Widely held, which is eco-
nomically significant as well.
H2 is also widely supported. The cultural dimension of Harmony has a negative impact on investors
objectives, which implies that countries with a high emphasis on Harmony can be characterized as
control-oriented, and countries with a low emphasis on Harmony as liquidity-oriented. The cultural
dimension of Autonomy has a positive impact on investors objectives, that is to say countries with a
20
low emphasis on Autonomy can be characterized as control-oriented, whereas countries with a high
emphasis on the cultural dimension of Autonomy can be characterized as liquidity-oriented. All of
the regression coefficients of the focal cultural variables are highly significant.
The coefficient estimates are again significant in economic terms. Compared to the mean of
Close_vw, a one-standard-deviation increase in Harmony would induce a 0.52 0.19 = 0.0988 de-
crease in the Close_vw measure, which corresponds to about a 21 % decrease in Close_vw. A one-
standard-deviation increase in Autonomy would induce a 0.70 0.19 = 0.1330 increase in the
Close_vw measure, which corresponds to about a 29 % increase in Close_vw.
H3 is supported in parts. The cultural dimension of Egalitarianism shows no significant impact. None-
theless, the cultural dimension of Hierarchy has a significantly positive impact, so that countries with
a low emphasis on Hierarchy display complex ownership structures, and countries with a high em-
phasis on Hierarchy display transparent ownership structures.
All else equal, a one-standard-deviation increase in Hierarchy would induce a 0.42 0.13 = 0.0546
increase in the OwnerConc measure. In percentage terms, relative to the mean of OwnerConc, this
corresponds to about a 12 % increase in OwnerConc, which is still economically significant.
At first sight, the impact of Harmony on the protection of minority shareholders in H4 seems to be
supported, yet it must be traced back to the impact of the legal environment and the institutional
development, as the latter two variables are highly significant even in the regression with all control
variables simultaneously employed, while the coefficient of Harmony becomes insignificant. Also, the
impact of the cultural dimension of Egalitarianism cannot be recognized as significant.
21
A similar result can be observed for the impact of national culture on the role of corporate boards in
H5. The cultural dimension of Embeddedness has no significant impact, and the impact of the cultur-
al dimension of Harmony is again overlapped by the highly significant impact of the legal environ-
ment and the institutional development.
H6 can again be supported in parts. The cultural dimension of Harmony has a negative impact on
takeover activity, which means that in countries with a high emphasis on Harmony, takeovers tend to
be rare, and in countries with a low emphasis on Harmony, takeovers tend to be frequent. The rela-
tionships are highly significant. The cultural dimension of Mastery has no significant impact on the
level of takeover activity.
Compared to the mean, a one-standard-deviation increase in Harmony would induce a 0.44 0.04 =
0.0176 decrease in the M&AValue measure. In percentage terms, this corresponds to about a 12 %
decrease in M&AValue, which again is still economically significant.
These calculations indicate that the statistically significant coefficient estimates for the corporate
governance characteristics are also economically significant. The regression estimates show that
certain dimensions of national culture exert a strong influence on corporate governance, even after
we account for other determinants.
5 Discussion
The following part discusses the robustness of our results to an alternative specification of national
culture by the Hofstede cultural model, elaborates on the impact of the control variables in the
above regression results, and addresses causality issues.
22
5.1 The Hofstede cultural dimensions: a comparison
There exist many different value approaches to characterize cultures. We have used the model pro-
vided by Schwartz which, as described in section 2.1, seems to be superior to other models for sever-
al reasons. Another well accepted and widely used framework is that of Hofstede. The original Hof-
stede (2001) cultural model introduces four cultural dimensions that address basic societal problems
as well. A fifth dimension labeled Long-term Orientation was added later, but as data availability for
this dimension is very limited, we only refer to the original four dimensions. Despite some conceptual
differences, the sets of dimensions also exhibit some similarities. Therefore, we employ the Hofstede
model for robustness checks in the following. Moreover, by these additional analyses, we are able to
verify our assertion of the superiority of the Schwartz approach in comparison to the Hofstede cul-
tural model. And thirdly, the detailed empirical examination of the explanatory power of the Hof-
stede model may offer additional, i.e., complementary, insights to the cultural determinants of cor-
porate governance systems in comparison to our previous findings.
Individualism and Collectivism describes the relationship between the individual and the collectivity
that prevails in a given society. Individualism and Collectivism overlaps with Autonomy versus Em-
beddedness, as both share a concern for the relationship between the individual and the collective.
Still, the dimensions differ, as values like SOCIAL ORDER and FREEDOM are not contained in Individualism
and Collectivism (Schwartz, 2004). In our sample, according to Table 6, Individualism and Collectivism
is correlated 0.59 with Embeddedness (1 % significance level), and 0.56 with Autonomy (1 % signi-
ficance level), which suggests considerable empirical overlap.
Power Distance is the extent to which different societies handle human inequality differently. Power
Distance is related to the Hierarchy versus Egalitarianism dimension, as both share a concern for
legitimizing social inequality. However, they are still distinct, as values like SOCIAL JUSTICE and SOCIAL
POWER are not relevant in Power Distance (Schwartz, 2004). Power distance is correlated 0.30 with
Hierarchy (5 % significance level), 0.46 with Egalitarianism (1 % significance level).
Masculinity and Femininity refers to the distribution of roles between genders. Masculinity and Fe-
mininity might be related to Mastery, as both share an emphasis on assertiveness, activity and ambi-
tion. Though, Mastery does not comprise a contrast to feminine values, which results in little overlap
(Schwartz, 2004). Masculinity and Femininity is only correlated 0.15 with Mastery (no significance on
a 10 % level).
23
Uncertainty Avoidance deals with a societys tolerance for uncertainty and ambiguity and refers to its
search for truth. Uncertainty Avoidance might overlap with Harmony, as both idealize harmonious
order. Yet, there is an important difference between the two value dimensions: Harmony rests on
FITTING INTO NATURE, whereas Uncertainty Avoidance refers to harmony by an active control of ambigu-
ity (Schwartz, 2004). This little overlap is confirmed by the low correlation of only 0.24 (no signific-
ance on a 10 % level).
Based on these general characteristics of the Hofstede cultural dimensions, in particular Individual-
ism and Collectivism as well as Power Distance may be viewed as (imperfect) proxies of Autono-
my/Embeddedness on the one side and Hierarchy/Egalitarianism on the other side. Masculinity and
Femininity as well as Uncertainty Avoidance do not seem to be sufficiently related to the Schwartz
cultural dimensions to be suited as substitutes for Mastery and Harmony.
Against this background, we estimate multivariate regression models of each dimension of corporate
governance on the Hofstede dimensions of national culture,

'()
*+

, -(.
(3)
where is the variable representing the corporate governance dimension studied
! 1, , 6&, and is again the set of country-specific control variables representing the economic,
legal, macroeconomic, political and institutional development. Table 8 presents the regression re-
sults.
For H1 (cultural determinants of corporate control), Individualism and Collectivism has a positive and
significant impact in most of the regressions, which substantiates the positive impact of Autonomy
and the negative impact of Embeddedness. Regarding H2 (cultural determinants of investors objec-
tives), Individualism and Collectivism again possesses a positive and significant impact, which verifies
24
the positive impact of Autonomy. For H3 (cultural determinants of ownership structure), we find no
significant impact of Power Distance, which is in accordance with the insignificance of Egalitarianism
on the one hand, but does not provide any robustness for the positive impact of Hierarchy on the
other hand. Yet, this might be caused by the relatively small correlation between Hierarchy and Pow-
er Distance. For H4 (cultural determinants of protection of minority shareholders), Power Distance
has no significant impact, which complies with the insignificance of Egalitarianism. For H5 (cultural
determinants of corporate boards), we cannot report any significant relationships for Individualism
and Collectivism, which matches our results for Embeddedness. Summarizing, as far as possible,
these additional regressions point to similar results as our original approach based on the Schwartz
cultural model.
In addition, there is certainly some remarkable explanatory power of the Hofstede dimension Uncer-
tainty Avoidance which exhibits a significant influence with respect to H4, H5, and H6 (cultural de-
terminants of takeover activity). In particular, the findings with respect to H4 and H5 are worth men-
tioning, as in contrast to the influence of the Schwartz cultural dimensions the significance of
Uncertainty Avoidance remains stable even when controlling for the legal and institutional environ-
ment. Moreover, the predominant negative impact of Uncertainty Avoidance in H4 and H6 is consis-
tent with Kwok and Tadesse (2006), who show that countries with higher Uncertainty Avoidance
tend to have bank-based financial systems. Nevertheless, the positive influence of Uncertainty
Avoidance regarding H5 contradicts this conclusion.
Moreover, as a general assessment, the Schwartz framework is genuinely superior to the Hofstede
framework. First and foremost, the Schwartz cultural value model has six dimensions, whereas the
(original) Hofstede framework has only four dimensions. This narrows the explanatory power of the
Hofstede model to a great extent, as some dimensions collapse into one. Second, for these four di-
25
mensions we can report considerably fewer significant relationships between national culture and
corporate governance. Third, due to a very small availability of data, the Hofstede framework cap-
tures only regions with little cultural variety. The countries for which the Hofstede data are available
are often highly developed and exhibit similar economic characteristics. This is indicated by the li-
mited relevance of control variables in Table 8. Economic development has particularly in contrast
to Table 7 only in a very rare number of regression models significant impact, and other control
variables have no impact, either. In consideration of the other studies presented documenting the
impact of certain control variables, these findings are beyond doubt intriguing.
5.2 Control variables
The fact that most of our results are highly significant and remain robust even when adding control
variables to the regression model is consistent with Doidge et al. (2007), who find that proxies for the
legal environment, economic development, and financial development explain much less of the vari-
ation in corporate governance than country dummy variables. Therefore, we can confirm our general
hypothesis that national culture has a consistent impact on corporate governance and must be seen
as a main determinant of the structure of a corporate governance system of a country. The impact of
most of the control variables is rather weak and non-systematic as a rule. Merely the legal environ-
ment and institutional development should be examined more closely, especially as La Porta et al.
(1998) show that the legal system is an essential determinant of the financial system of a country.
However, our empirical analyses reveal that national culture must at least be regarded as an equally
important determinant. Nevertheless, some elements of the corporate governance system might be
ascribed to the legal environment and institutional development solely, such as the protection of
minority shareholders and the role of corporate boards (see Hypotheses H4 and H5). As these issues
are particularly strongly related to the legal and institutional framework, these findings are not sur-
prising. In all other cases, the impact of the cultural dimensions remains stable.
26
The relationship between the legal and institutional environment and national culture is a critical
issue. La Porta et al. (2008) look into this matter as well and state that the notion of culture focusing
on beliefs is consistent with their legal view and should thus lead to similar results. Strictly speaking,
this would render the control for the legal environment indeed unnecessary. To capture the relation
between national culture and the legal environment, we estimate a logistic regression of the legal
environment on the dimensions of national culture. We estimate the likelihood that a countrys legal
system is a common law system, assuming the corresponding probability is a function of a set of cul-
tural dimensions. Our findings demonstrate that the impact of national culture on the legal system is
indeed considerable. All six dimensions of national culture have a significant impact on the legal envi-
ronment. However, regarding the Pseudo-R2 statistics of 0.18 and 0.62, respectively, these values
suggest that the impact of the legal system can in fact be captured by national culture, but only to
some extent. The legal system still has some explanatory power of its own. The results are shown in
Table 9.
To capture the relationship between national culture and the institutional environment, we estimate
a robust regression model of the institutional development on the dimensions of national culture.
The regression analysis yields results similar to those above. Four of the dimensions of national cul-
ture have a significant impact on the institutional development of a country. The rather high R2 val-
ues of 0.48 and 0.56 confirm that national culture is highly relevant for the institutional develop-
ment, but again, there remains some explanatory power that belongs to the institutional environ-
ment itself. The results are shown in Table 10.
27
These results suggest that the findings particularly with respect to the rejection of hypotheses H4
and H5 need to be reconsidered. The relation between the legal and institutional environment and
national culture is an intricate issue, which should be addressed more thoroughly in a separate study.
5.3 Causality
The impact of culture on corporate governance can be twofold: first, cultural values may motivate
policy makers and interest groups to prefer certain corporate governance arrangements to others;
second, culture may interfere with corporate governance reforms that are not compatible with pre-
vailing value preferences. Beyond doubt, relationships between national culture and corporate go-
vernance are very dense. But, as corporate governance systems and national culture both evolve
over time, one needs to address the issue of causality: Does culture really precede the structure of
corporate governance systems or vice versa?
Corporate governance systems are clearly more recent phenomena than the basic elements of na-
tional culture. When companies and financial markets emerged, they developed differently in coun-
tries and faced manifold conditions, where the resulting corporate governance systems had to be
compatible with. In other words, national cultures had set the starting conditions when corporate
governance systems were first established. This argument has been labeled path dependency
(Bebchuk and Roe, 1999). According to this framework, national culture can be perceived as the
mother in the evolution of corporate governance systems in a causal sense.
Reverse causality would imply that culture would adapt rapidly to changes in the corporate gover-
nance system, and thus would be of no original relevance. In order to affect cultural values, the cor-
porate governance system must either be obtrusive or influence peoples daily life considerably. Giv-
en the way the Schwartz cultural value model operationalizes culture, only a negligible impact from
28
corporate governance to national culture seems possible. The data on national culture come from
respondents either unfamiliar with corporate governance systems or whose daily lives are unlikely to
be affected by them. Hence, there is little reason to expect reverse causality from the corporate go-
vernance system to cultural values in our study.
To formally address the issue of causality we use instrumental variables in two-stages linear least
squares regressions. The instruments are variables related to culture but not to corporate gover-
nance other than through culture.
Our instruments for the cultural dimensions of Embeddedness versus Autonomy and Hierarchy ver-
sus Egalitarianism are derived by analyzing the language spoken in a country. A large body of litera-
ture has shown that culture and language are inseparable and mutually constitute one another.
Though a detailed discussion of this literature is beyond the scope of this paper, there is substantial
evidence that language affects peoples social beliefs and value judgments (Whorf, 1956, Sapir,
1970). Culture and language may be connected through the conception of the person, which is coded
in the use of person-indexing pronouns, such as I and you in English. Main differences arise from
the question of whether to use a pronoun and which pronoun to use.
The cultural dimension of Embeddedness versus Autonomy concerns the nature of the relation be-
tween the person and the group. Kashima and Kashima (1998) relate this dimension to the linguistic
practice of pronoun drop, in particular the omission of the first-person singular pronoun (I in Eng-
lish). In some languages (like English, for example) it is mandatory to include a subject pronoun in
most sentences, while it is not required in other languages (in Spanish, for example) where these
pronouns can be dropped. An explicit use of I emphasizes the speakers person, whereas a lan-
guage that allows pronouns to be dropped reduces its prominence. Kashima and Kashima (1998)
29
examined major languages and coded a language as 2 if it almost always requires a first-person
singular pronoun in an independent clause and as 1 otherwise, and labeled the variable as Pronoun
Drop. Therefore, we expect a negative relationship between Pronoun Drop and Embeddedness ( =
0.19, p = 0.09) and a positive relationship between Pronoun Drop and Autonomy ( = 0.48, p =
0.00).
The cultural dimension of Egalitarianism versus Hierarchy regards the securing of responsible beha-
vior to preserve the social fabric. Kashima and Kashima (1998) associate this dimension to specific
types of second-person pronouns. In many languages, there are two types of second-person pro-
nouns (T and V types originating from tu and vos in Latin), which are used to index social distance. In
earlier English, the differentiation was initially made between thou and ye, but later vanished and
you became the only second-person pronoun. To use the T-V difference appropriately, the speak-
ers must observe interpersonal relationships carefully. This suggests that people who use a language
with multiple you would be more attentive to status difference or social distance than those who
have only one second-person singular pronoun. Kashima and Kashima (1998) coded a language with
only one second-person pronoun as 1, and a language with more than one second-person pronoun
as 2, and called the variable 2PS. Accordingly, we expect a positive relationship between 2PS and
Hierarchy ( = 0.25, p = 0.04) and a negative relationship between 2PS and Egalitarianism ( = 0.05,
p = 0.36). However, as the correlation coefficients already show, the relationships are opposed to our
predictions, and in fact, the linguistic instrument of 2PS turns out to be unsuitable for use as an in-
strument.
The cultural dimension of Mastery versus Harmony deals with the management of relationships be-
tween the natural and social world. As we lack a linguistic instrument for this dimension, we follow
Licht et al. (2007) and employ a historical variable for British heritage. Former colonies that expe-
30
rienced British rule score significantly lower on Harmony than other countries, referring to frontier
experience, active development, and the centrality of entrepreneurship as possible explanations. We
code a country as 1, if a country was a former British colony, and 0, otherwise, and name the
variable British Colony. Correspondingly, we expect a positive relationship between British Colony
and Mastery ( = 0.01, p = 0.47) and a negative relationship between British Colony and Harmony (
= 0.49, p = 0.00).
Table 11 reports first stage least square regressions of the cultural dimensions (for which we have
significant results regarding H1 to H6) on the instruments and remaining cultural dimensions. We
always utilize those respective cultural dimensions as control variables that are part of the corres-
ponding regressions in Table 7. Subject to the exclusion of 2PS, the coefficients of the instruments
and F-statistics are significant and indicate that Pronoun Drop is a suitable instrument for Embed-
dedness and Autonomy and British Colony is a suitable instrument for Harmony.
Table 12 presents second stage least squares regressions for our established hypotheses. We instru-
ment Autonomy (H1 and H2) and Embeddedness (H1) with Pronoun Drop, and Harmony (H2 and H6)
with British Colony. As we lack a suitable instrument for Hierarchy, we leave out H3. In most cases,
the variables exhibit strong coefficients in the expected directions. The only exception is Harmony in
H2, where the instrumental variable British Colony shows no explanatory power at all. Altogether,
the results suggest that a corporate governance system in a country is causally linked to cultural val-
ues and thus maintains itself over decades.
31
6 Implications
Because previous studies that link culture to corporate governance systems are rather limited, this
study presents a major extension of existing research on this field and makes two main contributions.
First, using detailed cross-country data, we document that national culture in general has a signifi-
cant influence on the configuration of corporate governance systems. Culture can be seen as a main
determinant for the prevalent features of corporate governance systems. Second, our study offers in
detail a comprehensive understanding of the impact of national culture on corporate governance, as
all cultural dimensions are included in the analysis and main characteristics of corporate governance
are examined separately. Table 13 summarizes the results.
6.1 Cultural orientations and corporate governance
This overview suggests an interesting systematization of countries with regard to their corporate
governance systems, in particular when we account for the bipolar structure of the cultural dimen-
sions Embeddedness versus Autonomy, Hierarchy versus Egalitarianism, and Mastery versus Harmo-
ny. According to the Schwartz model, the opposed values are regarded as conflicting, and hence
should lead to two fundamentally different systems. This is indeed the case. Countries with a strong
emphasis on the cultural dimensions of Embeddedness, Egalitarianism, and Harmony tend to have a
bank-based corporate governance system. Countries with a strong emphasis on the cultural dimen-
sions of Autonomy, Hierarchy, and Mastery possess the characteristics of a market-based system.
The bank-based insider system relies on values like SOCIAL ORDER and EQUALITY, whereas the market-
based outsider system leans on values like INDEPENDENCE and AUTHORITY. The differences would be-
come even clearer if we had data with larger sample sizes, which is indicated by the directions of the
non-significant results in Table 7.
32
Regarding the corporate governance systems of Japan and the UK as typical examples of the two
polar corporate governance systems, our theory is extensively supported. Japan is a country with a
strong emphasis on the cultural dimensions of Embeddedness, Egalitarianism, and Harmony, and has
an established bank-based corporate governance system. The UK is a country with a strong emphasis
on the cultural dimensions of Autonomy, Hierarchy, and Mastery, and is famous for its well-known
market-based system.
Figure 1 offers an additional verification of this systematization. We aggregate the cultural dimen-
sions and the dimensions of corporate governance to a single parameter each, and plot the parame-
ter representing the corporate governance system on the parameter representing national
culture /. In order to compute , all six corporate governance dimensions have been
normalized and summed up. For the parameter /, the sum of the values of the dimensions
Embeddedness, Egalitarianism, and Harmony is computed and subtracted by the sum of the values of
the dimensions Autonomy, Hierarchy, and Mastery. Higher values of / indicate an emphasis
on the cultural dimensions of Embeddedness, Egalitarianism, and Harmony, whereas lower values of
/ indicate an emphasis on the cultural dimensions of Autonomy, Hierarchy, and Mastery.
Higher values of the parameter point to a market-based system and lower values point to a
bank-based system. The linear trend line confirms our observed relationship, that countries with an
emphasis on the cultural dimensions of Embeddedness, Egalitarianism, and Harmony tend to have a
bank-based corporate governance system, and countries with an emphasis on the cultural dimen-
sions of Autonomy, Hierarchy, and Mastery tend to have a market-based system. Certainly, the influ-
ence of / interferes with the control variables discussed above, in particular Legal Environ-
ment and Institutional Development, so that these relationships are indeed worth to be examined in
more depth by future research. Nevertheless, the variables / and offer a simple
tool to highlight the general connection between cultural dimensions and corporate governance sys-
33
tems. This assessment is underpinned by the following analyses where we dwell on culturally in-
duced differences among countries regarding the parameter somewhat more.
>>> Insert Figure 1 about here <<<
6.2 Cultural regions
Though some of the country specific hypotheses developed earlier received only mixed support, na-
tional context is a strong moderator for corporate governance nevertheless. Figure 2 reveals that
there exist nine culturally distinct world regions which show considerable differences in their corpo-
rate governance regimes.
Table 14 shows the cultural orientations that characterize each of the distinct cultural regions. The
cultural emphases were evaluated using point-biserial correlations as suggested by Schwartz (2004).
Although many models using different frameworks have been developed for dividing the world into
homogeneous groupings, basic groupings are similar, and a related classification can be found in
Gupta et al. (2002).
Additional verification for the differences among cultural regions can be derived using an analysis of
variance (ANOVA). We separate countries into cultural regions according to Table 14, and calculate
for each group of countries the mean and the variance for our parameter . We then de-
compose the total variance in explained variance or between-group variability, which is the varia-
bility due to the differences among the group means, and the unexplained variance or within-
34
group variability, which is the variability due to the differences between the data in each group and
the group mean. The results can be found in Table 15.
For our data, the explained variance is 24.12, and very large compared to the unexplained variance of
3.32. The highly significant F-statistic of 7.27 thus suggests strong heterogeneity of the data. Howev-
er, ANOVA as such offers neither information on between how many nor on between which cultural
regions differences exist. Therefore, we provide supplementary boxplots for our aggregate corporate
governance parameter . Notches display the variability of the median between the groups.
The width of a notch is computed so that box plots whose notches do not overlap have different
medians at the 5 % significance level.
Corporate Governance in the English-speaking countries is significantly different from the rest of the
world, as has considerable higher values than any other cultural region. Futhermore, cor-
porate governance in Latin America differs significantly from corporate governance in Confucian
countries, which is closest to corporate governance in the English-speaking countries. The remaining
regions exhibit very balanced levels of corporate governance on a sparse range.
7 Conclusion
This study shows that national culture is an essential determinant for the design of corporate gover-
nance systems. After the derivation of six hypotheses which summarize the proposed relationships
between culture and corporate governance, we estimate multivariate regression models to examine
the hypotheses empirically. We find significant support for most parts of our hypotheses.
35
Our model accurately maps national diversity because it disaggregates various dimensions of corpo-
rate governance. The value dimension approach provides a suitable means for rigorously addressing
informal social institutions like national culture. It provides a theory-driven, universally validated
operationalization of fundamental societal orientations and enables us to derive and empirically test
hypotheses about relations between national culture and corporate governance.
Our analysis features considerable advantages over previous studies on national culture and corpo-
rate governance. First and foremost, our study offers a more extensive approach than comparable
studies, as we include all cultural dimensions of the Schwartz model in our examination and consider
six dimensions of corporate governance systems. Furthermore, our study is based on the Schwartz
cultural value model, which offers not only a more recent dataset, but is also presumed to be supe-
rior to the Hofstede model. In addition, our study features a larger sample size than comparable stu-
dies.
Like other studies, this study has its limitations. Firstly, as we use socio-economical variables to map
the main characteristics of corporate governance systems, the measurement is not precise. To alle-
viate this problem, the study should be repeated using alternative measures for the variables. Se-
condly, for some variables the sample size is only moderate. Increasing the sample size would lead to
more reliable results and should be the objective of further studies. Thirdly, our data are from differ-
ent points of time. However, this should not be a major problem, since culturalist scholars argue that
cultural values are relatively robust and practically unchanging over time. Nevertheless, it would be
preferable to have data from the same range of years.
Countries differ profoundly in their contexts in which corporate governance relationships are em-
bedded. An understanding of differences and similarities in national contexts provide insights about
36
the evolution of differences in corporate governance mechanisms over the last decades and about
their future development. For our purposes, it does not matter whether differences in corporate
governance structures have recently been narrowing, remaining the same, or increasing somewhat
a question that the data are insufficient to resolve. What is clear is that, notwithstanding the forces
of globalization, some key differences in corporate governance structures among countries have
persisted. Our cultural analysis sheds light on why economies, despite pressures to converge, vary in
their corporate governance structure. It also provides a basis for why some important differences
might persist.
In the wake of the recent financial and economic crisis, countries have launched wide-ranging regula-
tory measures to prevent future crises from turning up again. These attempts have involved corpo-
rate governance reforms which in particular address corporate risk-taking. However, reform propos-
als put forward by policymakers around the world vary on their enforcement strategies, whether
they are invoked by empowering either shareholders or stakeholders (Bruner, 2010).
The current paper underlines that alternative implementation strategies are indeed crucial, and
should be thoroughly elaborated by policymakers. The foregoing analysis highlights the differences of
the bank-based and market-based corporate governance systems, and reveals the potential competi-
tive strengths of each corporate governance system. Though each system involves certain trade-offs,
both systems are able to function properly, especially in terms of crisis prevention. Policymakers
need to be aware of the present variation in cultural understandings and resulting differences in the
balance of power between management, stakeholders, investors and government. As an example in
this vein, one might cite the Asian Shadow Financial Regulatory Committee, which suggests in its
recent statement on Governance of Financial Institutions in Asia: Lessons from the Financial Crisis
37
that cultural differences imply less emphasis on formal contracts and more obedience to authority in
Asia in contrast to the US.
Therefore, effective regulatory response implies very different challenges in each country. As corpo-
rate governance systems differ considerably in fundamental matters, political dynamics stimulating
reforms must differ in fundamental aspects in each country as well. If the cultural context out of
which reform efforts arise are not evaluated properly, corporate governance reforms pursued in a
country will fail to remedy the problem. (Bruner, 2010)
38
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Cultural Dimension Emphasis on Value Types
Embeddedness maintenance of the status quo SOCIAL ORDER, POLITENESS, NATIONAL SECURITY,
RECIPROCATION OF FAVORS, RESPECT FOR TRADI-
TION, SELF-DISCIPLINE, WISDOM, MODERATION,
HONORING OF PARENTS AND ELDERS, PRESERVING
PUBLIC IMAGE, OBEDIENCE, DEVOTION, FORGIVE-
NESS, CLEANLINESS
Intellectual and Affective desirability of individuals independently pursuing CURIOSITY, BROADMINDEDNESS, CREATIVITY,
Autonomy their own ideas PLEASURE, EXCITING LIFE, VARIED LIFE, ENJOYING
LIFE, SELF-INDULGENCE, FREEDOM, BROADMIN-
DEDNESS
Hierarchy legitimacy of an unequal distribution of power SOCIAL POWER, AUTHORITY, HUMBLENESS,
WEALTH
Egalitarianism sharing basic interests and showing concern for EQUALITY, SOCIAL JUSTICE, RESPONSIBILITY,
everyones welfare HONESTY, LOYALTY, HELPFULNESS
Mastery getting ahead through active self-assertion AMBITION, SUCCESS, DARING, COMPETENCE, SO-
CIAL RECOGNIZATION, INDEPENDENCE, INFLUENCE,
CHOOSING OWN GOALS, CAPABLE, SUCCESS
Harmony accepting the world as it is UNITY WITH NATURE, PROTECTING THE ENVIRON-
MENT, WORLD OF BEAUTY, A WORLD IN PEACE
Summary of the Schwartz cultural value model. For each cultural dimension, the basic concept and the underlying value
types are given.
Table 1: The Schwartz cultural value dimensions
42
Bank-based System Market-based System
Corporate Control Insider Outsider
Investors Objectives Strategic Financial
Ownership Structure Complex Transparent
Protection of Minority Shareholders Weak Strong
Corporate Boards Important Negligible
Takeover Activity Low High
Overview of the main characteristics of corporate governance systems in the bank-based and the market-based system.
Table 2: Dimensions of corporate governance
43
Embed- Aff. Au- Intell. Egalita-
Hierarchy Mastery Harmony
dedness tonomy Autonomy rianism
Africa South 3.20 3.51 3.89 2.00 4.00 3.73 3.62
Argentina 3.29 3.42 3.75 1.87 4.51 3.77 3.86
Brazil 3.48 3.36 3.90 2.09 4.66 3.68 4.02
Canada 3.31 4.06 4.34 2.23 4.58 4.13 3.49
China 3.97 3.52 4.43 3.74 4.48 4.64 4.00
Czech Republic 3.70 4.23 4.64 2.40 4.45 4.12 4.22
France 3.97 3.65 4.73 2.22 5.33 3.55 4.68
Germany 3.27 4.57 5.26 2.06 5.33 4.17 4.92
India 3.68 3.22 3.74 2.85 4.18 3.98 3.66
Iran 3.92 3.05 3.91 3.11 4.23 3.81 3.42
Italy 3.55 3.68 4.99 1.89 5.23 4.06 4.45
Japan 3.91 4.29 5.19 3.10 4.72 4.47 4.61
Nigeria 3.47 1.93 2.73 1.93 3.77 3.13 2.61
Philippines 3.32 2.38 3.23 2.06 3.89 3.08 3.32
Poland 3.96 3.37 4.35 2.59 4.53 3.79 4.08
Russia 3.86 3.61 4.01 2.53 4.33 3.88 4.07
United Kingdom 3.31 4.16 4.55 2.28 4.87 3.95 3.85
USA 3.32 3.67 3.95 2.13 4.39 3.83 3.15
Extract of the results of the Schwartz Value Survey for a selection of 18 countries. The empirical analysis relies on data for
all 73 countries included in the survey.
Table 3: Cultural variables for a selection of 18 countries
44
Criterion Variable Description Source
Variables for Corporate Governance
Corporate Control Widely held Fraction of firms with no controlling shareholder who Stulz (2005)
holds more than 10 % of the voting rights. Lower val-
ues indicate a more insider-oriented system, higher
values a more outsider-oriented system. Data for
2002.
Investors Objectives Close_vw Value-weighted average fraction of firm stock market Stulz (2005)
capitalization held by insiders. Higher values indicate
more strategic objectives, lower values more financial
objectives. Data for 2002.
Ownership Structure OwnerConc Average percentage of common shares owned by the La Porta et al. (2006)
top three shareholders in the ten largest non-financial,
privately-owned domestic firms in a given country.
Higher values indicate more complex ownership struc-
tures, lower values more transparent ownership struc-
tures. Data for 1994.
Protection of Minority ProtMin Ranking of the answers to: Interests of minority share- Lopez-Claros et al.
Shareholders holders in your country are (1 = not protected by law (2006)
and seldom recognized by majority shareholders, 7 =
protected by law and actively enforced). Data for
2006.
Corporate Boards EffBoards Ranking of the answers to: Corporate governance by Lopez-Claros et al.
investors and boards of directors in your country is (2006)
characterized by (1 = management has little accoun-
tability, 7 = investors and boards exert strong supervi-
sion of management decisions). Data for 2006.
Takeover Activity M&AValue M&A transaction value to GDP. This variable is the World Economic
rank value of the transaction in US dollars (as a per- Forum (2008)
centage of GDP). Data for 2006.
Control Variables
Economic Logarithm of real per capita GDP. CIA World Factbook
Development (2008)
Legal Environment Indicator variable that takes the value 1 for common La Porta et al. (1997)
law countries and 0 otherwise.
Macroeconomic Principal component of inflation and trade openness. DemirgKunt and
Conditions Inflation is the log difference of consumer price index. Levine (2001)
Trade openness is the sum of real exports and imports
as share of real GDP.
Political Conditions Principal component of revolution, assassination and DemirgKunt and
corruption. A revolution is defined as any illegal or Levine (2001)
forced change in the top of governmental elite, any
attempt at such a change, or any successful or unsuc-
cessful armed rebellion whose aim is independence
from central government. Assassination is the number
of assassinations per thousand inhabitants. Corruption
is a measure of corruption, with a scale from 0 (high
level) to 10 (low level).
Institutional Principal component of six institutional measures: Kaufmann et al.
Development voice and accountability, political stability and absence (2006)
of violence, government effectiveness, light regulatory
burden, rule of law, freedom from graft
This table describes the variables for corporate governance and the control variables utilized in the empirical section of the
paper and their sources.
Table 4: Variables and sources
45
Variable Mean Median S.D. Minimum Maximum N
Data on National Culture
Embeddedness 3.61 3.61 0.30 2.94 4.50 73
Affective Autonomy 3.34 3.34 0.72 1.66 4.76 73
Intellectual Autonomy 4.12 4.08 0.57 2.73 5.56 73
Hierarchy 2.19 2.15 0.45 1.15 3.74 73
Egalitarianism 4.48 4.44 0.46 3.61 5.42 73
Mastery 3.79 3.81 0.33 3.08 3.81 73
Harmony 3.83 3.82 0.51 2.61 4.92 73
Data on Corporate Governance

Corporate Control 0.22 0.10 0.25 0.00 0.90 29
Investors Objectives 0.46 0.50 0.19 0.10 0.87 35
Ownership Structure 0.46 0.49 0.13 0.18 0.67 43
Protection of Minority Shareholders 4.89 4.85 0.91 3.30 6.50 68
Corporate Boards 4.85 4.85 0.64 3.60 6.00 68
Takeover Activity 0.05 0.04 0.04 0.00 0.15 43
This table presents descriptive statistics for the variables. S.D. indicates the standard deviation, N the number of countries
with available data.
Table 5: Summary statistics
46
Variable 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22
1 Embeddedness 1.00
2 Affective Autonomy 0.21 1.00
3 Intellectual Autonomy -0.22 0.56*** 1.00
4 Hierarchy 0.42** 0.18 0.38* 1.00
5 Egalitarianism 0.67*** -0.07 -0.04 0.74*** 1.00
6 Mastery 0.87*** 0.12 -0.03 0.70*** 0.85*** 1.00
7 Harmony 0.88*** 0.12 -0.23 0.55*** 0.82*** 0.91*** 1.00
8 Corporate Control -0.04 -0.18 0.25 0.37* 0.41** 0.26 0.14 1.00
9 Investors Objectives 0.05 -0.04 0.09 0.38* 0.56*** 0.32 0.33* 0.77*** 1.00
10 Ownership Structure 0.07 0.30 0.41** 0.37* 0.40** 0.22 0.16 0.74*** 0.79*** 1.00
11 Protection of Minority Shareholders 0.21 -0.06 -0.04 0.21 0.58*** 0.30 0.31 0.37* 0.50*** 0.49*** 1.00
12 Corporate Boards -0.17 0.12 0.13 -0.16 -0.54* -0.29 -0.31 -0.33 -0.38* -0.43** -0.93*** 1.00
13 Takeover Activity -0.21 0.02 0.23 0.11 0.16 0.01 0.03 0.44** 0.43** 0.43** 0.50*** -0.58*** 1.00
14 Economic Development 0.60*** 0.03 -0.14 0.59*** 0.82*** 0.73*** 0.75*** 0.38* 0.37* 0.46** 0.60*** -0.62*** 0.37* 1.00
15 Legal Environment -0.77*** -0.22 0.25 -0.13 -0.26 -0.51*** -0.56*** 0.36* 0.17 0.23 0.21 -0.33 0.57*** -0.13 1.00
16 Macroeconomic Conditions 0.23 -0.29 -0.47*** -0.17 -0.02 0.02 0.07 0.11 0.09 0.11 -0.19 0.28 -0.38* -0.02 -0.41** 1.00
17 Political Conditions 0.25 0.26 0.16 0.58*** 0.58*** 0.46** 0.39* 0.20 0.32 0.34* 0.50*** -0.56*** 0.28 0.66*** 0.18 -0.27 1.00
18 Institutional Development -0.43** -0.14 -0.11 -0.60*** -0.80*** -0.68*** -0.65*** -0.40** -0.46** -0.54*** -0.72*** 0.76*** -0.49*** -0.80*** -0.08 0.41** -0.69*** 1.00
19 Individualism and Collectivism -0.59*** 0.70*** 0.54*** -0.25* 0.56*** 0.28** 0.41*** 0.53*** -0.37** -0.69*** 0.58*** 0.50*** 0.44*** 0.56*** 0.23 -0.04 0.32** -0.61*** 1.00
20 Power Distance 0.27 -0.67** -0.50*** 0.30** -0.46*** -0.35*** -0.28** -0.33* 0.33** 0.52*** -0.58*** -0.47*** -0.38** -0.58*** -0.16 0.00 -0.48*** 0.62*** -0.60*** 1.00
*
21 Masculinity and Femininity -0.04 -0.02 0.08 0.08 -0.12 0.15 0.04 0.34* 0.10 0.05 -0.13 -0.11 -0.27* -0.05 0.12 0.05 -0.16 0.11 0.11 0.21 1.00
22 Uncertainty Avoidance -0.13 -0.12 0.02 -0.27** 0.00 -0.11 -0.24 -0.15 0.24 0.29* -0.56*** -0.51*** -0.52*** -0.09 -0.54*** 0.50*** -0.10 0.22 -0.22 0.14 0.04 1.00
Correlation coefficients and corresponding significance. The first group of variables describes cultural dimensions according to the Schwartz model, the second group of variables is made of cen-
tral features of different corporate governance systems, the third group of variables consists of control variables, and the fourth group consists of cultural dimensions according to the Hofstede
framework. *** p 1 %, ** p 5 %, * p 10 %.
Table 6: Correlation matrix
47
Independent Independent
Dependent Variable: Corporate Control (H1) Dependent Variable: Corporate Control (H1)
Variables Variables
-0.55* -0.70** -0.72* -0.78*** -0.65** -0.70** -0.41* 1.3*** 1.25** 1.18** 1.18** 1.36*** 1.36** 1.15**
Embeddedness Autonomy
0.07 0.02 0.07 0.00 0.03 0.02 0.10 0.00 0.02 0.03 0.02 0.01 0.02 0.02
0.59** 0.74*** 0.75** 1.17*** 0.72*** 0.74*** 0.89*** -0.28 -0.30 -0.26 -0.28 -0.54 -0.26 -0.53
Hierarchy Egalitarianism
0.04 0.01 0.05 0.00 0.01 0.01 0.01 0.54 0.54 0.6 0.52 0.25 0.60 0.23
0.22 -0.22 -0.23 -0.53* -0.20 -0.22 -0.26 -0.71** -0.68* -0.48 -0.82** -0.59* -0.74* -0.42
Mastery Harmony
0.25 0.43 0.52 0.06 0.46 0.44 0.36 0.03 0.07 0.31 0.03 0.10 0.07 0.3
Economic 1.06** 1.08* 1.81*** 1.51** 1.08 1.66** Economic 0.09 -0.08 0.55 0.97 0.31 1.32**
Development 0.04 0.09 0.00 0.02 0.17 0.02 Development 0.87 0.89 0.31 0.15 0.64 0.06
Legal -0.01 0.27 Legal 0.21 0.29

Environment 0.96 0.18 Environment 0.48 0.29
Macroeconomic 0.62** 0.71*** Macroeconomic 0.41** 0.46**

Conditions 0.00 0.00 Conditions 0.03 0.02
Political -0.27 -0.41** Political -0.44** -0.52*

Institutional 0.02 -0.45 Institutional 0.32 -0.14

Development 0.98 0.27 Development 0.56 0.80
-0.30 -0.96*** -0.97** -1.23*** -1.2*** -0.96** -1.33*** -0.33 -0.37 -0.34 -0.49* -0.83** -0.34 -1.02***
Constant Constant
0.18 0.01 0.04 0.00 0.01 0.02 0.00 0.12 0.22 0.27 0.09 0.03 0.26 0.01
2 2
R 0.25 0.38 0.38 0.60 0.42 0.38 0.69 R 0.38 0.38 0.40 0.50 0.48 0.39 0.64
F 2.84* 3.65** 2.8** 6.9*** 3.27* 2.8* 5.47*** F 5.17*** 3.74** 3.03** 4.51*** 4.21*** 2.98** 4.38***
p 0.06 0.02 0.04 0.00 0.02 0.04 0.00 P 0.01 0.02 0.03 0.01 0.01 0.03 0.00
standard error 0.05 0.05 0.05 0.03 0.05 0.05 0.24 standard error 0.05 0.05 0.05 0.04 0.04 0.05 0.23
observations 29 29 29 29 29 29 29 Observations 29 29 29 29 29 29 29
adjusted R2 0.16 0.27 0.24 0.51 0.29 0.24 0.56 adjusted R2 0.31 0.28 0.27 0.39 0.36 0.26 0.49
Dependent Variable: Investors Objectives (H2) Dependent Variable: Investors Objectives (H2)
Variables Variables
-0.02 -0.17 0.05 -0.19 -0.18 -0.15 0.18 1.03*** 0.92** 0.74* 0.94*** 0.91** 0.81** 0.70*
0.94 0.53 0.87 0.49 0.52 0.56 0.53 0.00 0.01 0.07 0.01 0.02 0.03 0.08
-0.12 0.14 -0.10 0.23 0.15 0.14 0.01 0.22 0.16 0.26 0.10 0.16 0.14 -0.03
0.63 0.58 0.73 0.42 0.57 0.58 0.98 0.51 0.66 0.49 0.79 0.67 0.70 0.94
0.43** 0.05 0.15 -0.01 0.03 0.06 0.09 -0.78*** -0.71** -0.55* -0.73** -0.71** -0.68** -0.52*
Mastery Harmony
0.03 0.84 0.53 0.97 0.88 0.77 0.67 0.01 0.03 0.10 0.02 0.03 0.03 0.10
Economic 0.83*** 0.70** 1.00** 0.77* 0.14 0.46 Economic 0.21 0.16 0.38 0.21 -0.18 0.15
Legal 0.27 0.42 Legal 0.21 0.18

Macroeconomic 0.13 0.44 Macroeconomic 0.13 0.35**

Political 0.05 -0.25 Political 0.00 -0.16

Institutional -0.67* -1.00* Institutional -0.51 -0.88*

-0.12 -0.55** -0.44* -0.63** -0.53* -0.58** -0.82*** -0.35** -0.40** -0.44** -0.46** -0.40* -0.44** -0.75***
Constant Constant
0.57 0.04 0.10 0.03 0.07 0.03 0.01 0.03 0.03 0.02 0.02 0.07 0.02 0.00
R2 0.14 0.30 0.36 0.31 0.30 0.36 0.52 R2 0.45 0.45 0.47 0.47 0.45 0.49 0.57
F 1.74 3.21** 3.22** 2.65** 2.50* 3.29** 3.57** F 8.37*** 6.25*** 5.22*** 5.14*** 4.83*** 5.50*** 4.27***
p 0.18 0.03 0.02 0.04 0.05 0.02 0.01 P 0.00 0.00 0.00 0.00 0.00 0.00 0.00
observations 35 35 35 35 35 35 35 Observations 35 35 35 35 35 35 35
2
adjusted R 0.06 0.21 0.25 0.20 0.18 0.25 0.38 adjusted R2 0.39 0.38 0.38 0.38 0.36 0.40 0.43
Least squares regressions of the dimensions of corporate governance on the Schwartz dimensions of national culture for the cross-section of countries.
*** p 1 %, ** p 5 %, * p 10 %. p-values in italics.
48
Dependent Variable: Ownership Structures (H3) Dependent Variable: Ownership Structures (H3)
Variables Variables
0.06 0.13 0.20 0.14 0.09 0.17 0.30 0.73** 0.58* 0.40 0.58* 0.56 0.42 0.34
0.79 0.52 0.33 0.49 0.67 0.37 0.19 0.03 0.09 0.30 0.10 0.13 0.24 0.40
0.38* 0.47** 0.38* 0.49** 0.51** 0.45** 0.42* -0.23 -0.33 -0.31 -0.34 -0.32 -0.33 -0.35
0.08 0.02 0.09 0.02 0.02 0.03 0.08 0.50 0.35 0.39 0.36 0.37 0.35 0.34
0.19 -0.04 -0.02 -0.05 -0.10 -0.10 -0.14 -0.21 -0.14 0.08 -0.14 -0.14 -0.12 0.00
Mastery Harmony
0.24 0.81 0.89 0.77 0.62 0.56 0.47 0.44 0.62 0.81 0.62 0.63 0.67 0.99
Economic 0.44** 0.46*** 0.46** 0.38* 0.05 0.06 Economic 0.29 0.30 0.30 0.28 -0.01 0.02
Legal 0.16 0.19 Legal 0.21 0.15

Macroeconomic 0.07 0.25 Macroeconomic 0.01 0.13

Political 0.13 0.04 Political 0.03 0.01

Institutional -0.46 -0.59** Institutional -0.44 -0.47

0.00 -0.10 -0.11 -0.10 -0.09 -0.11 -0.13 -0.07 -0.11 -0.13 -0.11 -0.10 -0.13 -0.15
Constant Constant
0.99 0.51 0.46 0.51 0.54 0.47 0.38 0.65 0.50 0.43 0.50 0.52 0.43 0.38
R2 0.19 0.31 0.33 0.31 0.32 0.35 0.41 R2 0.16 0.20 0.22 0.20 0.20 0.23 0.25
F 3.07** 4.2*** 3.63*** 3.33*** 3.42*** 4.04*** 2.99*** F 2.45* 2.31* 2.10* 1.80 1.81 2.25* 1.45
p 0.04 0.01 0.01 0.01 0.01 0.01 0.01 p 0.08 0.08 0.09 0.14 0.14 0.07 0.21
observations 43 43 43 43 43 43 43 observations 43 43 43 43 43 43 43
Dependent Variable: Protection of Minority Shareholders (H4) Dependent Variable: Protection of Minority Shareholders (H4)
Variables Variables
-0.28* -0.16 0.09 -0.21 -0.26 -0.09 0.13 0.50** 0.44* 0.16 0.92*** 0.93*** 0.28 0.37
0.06 0.23 0.46 0.19 0.12 0.43 0.35 0.01 0.03 0.35 0.00 0.00 0.12 0.11
0.05 0.11 -0.20 0.14 0.24 0.15 -0.1 0.45*** 0.34 0.21 -0.24 -0.26 0.26* -0.23
0.74 0.47 0.19 0.45 0.21 0.23 0.54 0.01 0.06 0.15 0.36 0.32 0.10 0.27
0.26* 0.07 0.18 0.14 0.04 -0.04 0.03 -0.42** -0.39** 0.19 -0.26 -0.27 -0.36** 0.18
Mastery Harmony
0.06 0.64 0.17 0.37 0.81 0.73 0.85 0.02 0.02 0.28 0.21 0.18 0.02 0.38
Economic 0.48*** 0.44*** 0.33* 0.29* -0.29 -0.38* Economic 0.21 0.15 0.08 0.09 -0.38* -0.31
Legal 0.46*** 0.31*** Legal 0.58*** 0.35***

Macroeconomic -0.13 0.11 Macroeconomic -0.08 0.06

Political 0.22 0.06 Political 0.04 0.02

Institutional -0.94*** -0.93*** Institutional -0.82*** -0.63***

-0.03 -0.03 0.12 0.19 0.18 -0.02 0.25* -0.01 0.00 0.12 0.27* 0.27* 0.00 0.27**
Constant Constant
0.77 0.75 0.22 0.15 0.16 0.80 0.02 0.91 1.00 0.15 0.02 0.02 0.96 0.01
2 2
R 0.14 0.31 0.44 0.33 0.35 0.51 0.62 R 0.36 0.41 0.58 0.50 0.50 0.55 0.67
F 3.40** 7.12*** 8.23*** 4.16*** 4.43*** 9.48*** 7.28*** F 9.05*** 9.99*** 9.85*** 8.45*** 8.31*** 9.85*** 8.99***
p 0.02 0.00 0.00 0.00 0.00 0.00 0.00 p 0.00 0.00 0.00 0.00 0.00 0.00 0.00
49
Dependent Variable: Corporate Boards (H5) Dependent Variable: Corporate Boards (H5)
Variables Variables
0.28* 0.17 -0.11 0.21 0.26 0.11 -0.09 -0.48*** -0.39* -0.06 -0.88*** -0.89*** -0.27 -0.28
0.06 0.22 0.37 0.19 0.12 0.37 0.56 0.01 0.06 0.74 0.00 0.00 0.19 0.28
0.08 0.03 0.33** -0.03 -0.15 -0.01 0.21 -0.40* -0.28 -0.18 0.20 0.23 -0.22 0.11
0.63 0.86 0.03 0.89 0.42 0.95 0.23 0.04 0.13 0.28 0.44 0.39 0.22 0.63
-0.23 -0.04 -0.11 -0.01 0.02 0.04 0.04 0.43** 0.38** -0.15 0.32 0.34* 0.36** -0.14
Mastery Harmony
0.11 0.78 0.38 0.53 0.90 0.75 0.81 0.02 0.03 0.44 0.12 0.10 0.03 0.54
Economic -0.46*** -0.47*** -0.35** -0.32** 0.13 0.11 Economic -0.26* -0.28* -0.13 -0.14 0.20 0.06
Legal -0.48*** -0.29*** Legal -0.53*** -0.33**


Political -0.25 -0.15 Political -0.08 -0.11

Institutional 0.72*** 0.51* Institutional 0.64*** 0.21

0.04 0.04 -0.12 -0.16 -0.14 0.03 -0.28*** 0.01 -0.00 -0.11 -0.23** -0.24** -0.00 -0.29**
Constant Constant
0.74 0.74 0.23 0.23 0.26 0.78 0.01 0.94 1.00 0.26 0.04 0.04 0.98 0.01
2 2
R 0.12 0.29 0.47 0.34 0.35 0.40 0.53 R 0.30 0.36 0.50 0.50 0.50 0.44 0.54
F 2.91** 6.32*** 9.29*** 4.41*** 4.48*** 8.16*** 5.01*** F 9.00*** 8.64*** 9.45*** 8.52*** 8.24*** 9.56*** 5.31***
p 0.04 0.00 0.00 0.00 0.00 0.00 0.00 p 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Dependent Variable: Takeover Activity (H6) Dependent Variable: Takeover Activity (H6)
Variables Variables
-0.36* -0.29* -0.03 -0.22 -0.22 -0.25 0.18 0.37 -0.06 -0.25 0.05 0.08 -0.11 -0.32
0.10 0.10 0.85 0.28 0.31 0.16 0.40 0.16 0.83 0.31 0.88 0.83 0.68 0.36
0.15 0.52** 0.21 0.47 0.55 0.50 0.10 0.64 0.31 0.38 0.26 0.16 0.27 0.36
0.50 0.01 0.26 0.05 0.02 0.02 0.65 0.02 0.26 0.12 0.48 0.66 0.30 0.29
0.04 -0.53*** -0.29 -0.43* -0.51** -0.51*** -0.25 -0.89*** -0.62*** -0.48* -0.59** -0.50* -0.62*** -0.44*
Mastery Harmony
0.83 0.01 0.11 0.08 0.04 0.01 0.27 0.00 0.01 0.08 0.05 0.06 0.00 0.10
Economic 1.03*** 0.86*** 0.86*** 0.95*** 0.69* 0.67 Economic 0.87*** 0.57** 0.67* 0.89** 0.29 0.37
Legal 0.48*** 0.54*** Legal 0.57*** 0.49**

Macroeconomic -0.15 0.08 Macroeconomic -0.15 0.00

Political 0.07 -0.17 Political -0.06 -0.11

Institutional -0.29 -0.38 Institutional -0.60** -0.42

-0.07 -0.40** -0.32** -0.25 -0.28 -0.35** -0.29* -0.12 -0.28* -0.24* -0.18 -0.24 -0.20 -0.27
Constant Constant
0.66 0.01 0.02 0.20 0.15 0.03 0.10 0.39 0.05 0.05 0.30 0.20 0.13 0.12
R2 0.07 0.40 0.58 0.39 0.37 0.42 0.59 R2 0.31 0.45 0.58 0.42 0.40 0.52 0.58
F 1.05 6.33*** 9.18*** 3.80*** 3.54*** 5.30*** 4.86*** F 5.73*** 7.70*** 9.28*** 4.38*** 4.06*** 8.15*** 4.68***
p 0.38 0.00 0.00 0.01 0.01 0.00 0.00 p 0.00 0.00 0.00 0.00 0.01 0.00 0.00
2 2
adjusted R 0 0.34 0.52 0.29 0.27 0.34 0.47 adjusted R 0.25 0.39 0.52 0.33 0.30 0.46 0.46
Table 7: Empirical results
50
Dependent Variable: Corporate Control (H1) Dependent Variable: Investors Objectives (H2)
Variables Variables
Individualism and 0.52** 0.48** 0.47** 0.37 0.46** 0.48** 0.14 Individualism and 0.61*** 0.57*** 0.55** 0.55** 0.57** 0.55** 0.44*
Collectivism 0.02 0.03 0.04 0.15 0.05 0.04 0.62 Collectivism 0.00 0.00 0.01 0.01 0.01 0.01 0.05
0.01 0.11 0.05 0.25 0.10 0.11 0.32 -0.09 0.05 0.01 0.07 0.06 0.07 0.16
Power Distance Power Distance
0.96 0.64 0.83 0.36 0.69 0.67 0.32 0.66 0.81 0.96 0.75 0.80 0.73 0.56
Masculinity and 0.37** 0.38** 0.30* 0.39** 0.36** 0.38** 0.28 Masculinity and -0.07 -0.06 -0.13 -0.06 -0.06 -0.04 -0.10
Femininity 0.02 0.02 0.08 0.02 0.03 0.03 0.13 Femininity 0.62 0.67 0.38 0.69 0.69 0.77 0.54
Uncertainty -0.12 -0.11 0.04 -0.27 -0.11 -0.11 -0.10 Uncertainty -0.08 -0.09 0.05 -0.11 -0.09 -0.07 -0.01
Avoidance 0.42 0.45 0.81 0.21 0.49 0.47 0.69 Avoidance 0.52 0.50 0.75 0.50 0.51 0.61 0.98
Economic 0.42 0.36 0.84 0.65 0.44 1.15 Economic 0.41 0.42 0.47 0.37 0.24 0.46
Legal 0.25 0.37* Legal 0.21 0.27


Political -0.13 -0.34 Political 0.03 -0.11

Institutional 0.02 -0.71 Institutional -0.21 -0.51

-0.18 -0.44 -0.41 -0.61* -0.57 -0.44 -1.14** -0.14 -0.34* -0.36** -0.37* -0.32 -0.36* -0.64**
Constant Constant
0.28 0.14 0.16 0.08 0.14 0.16 0.02 0.29 0.07 0.05 0.10 0.13 0.06 0.05
R2 0.43 0.46 0.50 0.48 0.46 0.46 0.58 R2 0.49 0.53 0.56 0.54 0.54 0.54 0.58
F 4.51 3.87 3.61 3.43 3.18 3.09 2.96 F 7.29 6.66 5.93 5.38 5.37 5.46 3.85
p 0.01 0.01 0.01 0.02 0.02 0.02 0.02 p 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Least squares regressions of the dimensions of corporate governance on the Hofstede dimensions of national culture for the cross-section of countries.
51
Dependent Variable: Ownership Structures (H3) Dependent Variable: Protection of Minority Shareholders (H4)
Variables Variables
Individualism and 0.23 0.17 0.16 0.13 0.17 0.12 -0.01 Individualism and 0.24** 0.19* 0.19* 0.25** 0.25** 0.13 0.14
-0.14 -0.01 -0.00 0.04 0.00 0.00 0.13 -0.27*** -0.21** -0.21* -0.20 -0.13 -0.17 -0.07
0.53 0.98 0.98 0.87 0.99 0.98 0.65 0.01 0.05 0.06 0.11 0.24 0.12 0.53
Masculinity and -0.07 -0.06 -0.08 -0.05 -0.06 -0.02 -0.01 Masculinity and -0.07 -0.06 -0.08 -0.07 -0.05 -0.03 0.04
Uncertainty -0.15 -0.16 -0.13 -0.24 -0.16 -0.14 -0.24 Uncertainty -0.38*** -0.38*** -0.34*** -0.30*** -0.34*** -0.34*** -0.36***
Economic 0.44 0.44 0.59 0.42 0.20 0.38 Economic 0.25 0.25 0.03 -0.06 -0.12 -0.44
Legal 0.06 0.09 Legal 0.08 -0.02

Macroeconomic 0.12 0.28 Macroeconomic -0.09 0.07

Political 0.02 -0.01 Political 0.18* 0.18*

Institutional -0.27 -0.50 Institutional -0.44** -0.56**

0.00 -0.20 -0.21 -0.27 -0.19 -0.20 -0.39 0.39*** 0.28*** 0.28*** 0.49*** 0.52*** 0.27*** 0.46***
Constant Constant
0.99 0.35 0.35 0.29 0.42 0.34 0.21 0.00 0.01 0.01 0.00 0.00 0.01 0.00
R2 0.17 0.22 0.23 0.23 0.22 0.23 0.26 R2 0.62 0.64 0.65 0.66 0.69 0.69 0.75
F 1.80 1.89 1.55 1.58 1.53 1.62 1.14 F 18.04 15.37 12.8 10.7 11.96 15.25 10.18
p 0.15 0.12 0.19 0.18 0.20 0.17 0.30 p 0.00 0.00 0.00 0.00 0.00 0.00 0.00
52
Dependent Variable: Corporate Boards (H5) Dependent Variable: Takeover Activity (H6)
Variables Variables
Individualism and -0.24* -0.16 -0.16 -0.21* -0.20* -0.15 -0.26* Individualism and 0.36** 0.23 0.22 0.18 0.21 0.25 0.08
0.20 0.11 0.10 0.17 0.08 0.10 0.12 -0.11 0.03 0.09 0.14 0.06 0.02 0.19
0.13 0.41 0.46 0.21 0.54 0.46 0.38 0.50 0.85 0.55 0.50 0.75 0.88 0.32
Masculinity and 0.07 0.06 0.08 0.02 -0.01 0.06 -0.03 Masculinity and -0.24** -0.23** -0.27*** -0.17 -0.19 -0.24** -0.27**
Uncertainty 0.36*** 0.37*** 0.31*** 0.30*** 0.38*** 0.36*** 0.33*** Uncertainty -0.52*** -0.51*** -0.27** -0.67*** -0.57*** -0.52*** -0.43**
Economic -0.37* -0.37* 0.00 0.11 -0.30 0.32 Economic 0.56*** 0.58*** 0.76** 0.76** 0.64* 1.08***
Legal -0.12 0.07 Legal 0.39*** 0.42***


Political -0.27* -0.28 Political -0.18 -0.26*

Institutional 0.09 0.02 Institutional 0.09 -0.14

-0.36*** -0.20 -0.20 -0.48*** -0.52*** -0.20 -0.61*** 0.00 -0.24 -0.24** -0.30 -0.29 -0.25 -0.52***
Constant Constant
0.00 0.12 0.12 0.00 0.00 0.13 0.00 0.97 0.11 0.07 0.14 0.11 0.11 0.01
R2 0.46 0.50 0.52 0.59 0.64 0.51 0.66 R2 0.51 0.59 0.69 0.61 0.62 0.59 0.74
F 9.47 8.75 7.47 7.88 9.90 7.17 6.57 F 9.17 9.73 12.05 7.13 7.34 7.92 7.46
p 0.00 0.00 0.00 0.00 0.00 0.00 0.00 p 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Table 8: Robustness checks: alternative measures of cultural dimensions
53
Independent Variables Dependent Variable: Legal Environment Independent Variables Dependent Variable: Legal Environment
Embeddedness -2.96** Autonomy 2.01*

0.05 0.09
Hierarchy 2.77** Egalitarianism 3.09*

0.02 0.07
Mastery -1.93* Harmony -8.07**

0.10 0.00
Constant 10.68* Constant 7.01*

0.07 0.09
Pseudo-R2 0.18 Pseudo-R2 0.62

2 8.04** 2 34.33***
p 0.05 p 0.00
percent success 68.90 percent success 88.50
observations 61 Observations 61
The legal environment of a country is described as a function of the various dimensions of national culture using a logit regression.
Let 1 be an indicator variable that takes the value 1 for common law countries and 0 otherwise. Let P be the probability that a country
has a common law system. The natural logarithm of the corresponding likelihood L, given the explanatory cultural variables, is described by
ln 1 1 4 ln 5! ; ; &
!1 7 1& 4 ln81 7 5! ; ; &9 (4)
ln 1 1 4 ln 5! ; ; &
!1 7 1& 4 ln81 7 5! ; ; &9 (5)
where 5! ; ; & and 5! ; ; & are the cumulative logistic distributions evaluated at
! ; ; & and ! ; ; &, respectively. In consideration of the bipolarity of the cultural dimensions again,
we never include two bipolar dimensions at the same time.
Table 9: Logit model of national culture and legal system
54
Dependent Variable: Institutional Development Dependent Variable: Institutional Development
Variables Variables
Embeddedness 2.26*** Autonomy -2.74***
0.01 0.00
Hierarchy 1.56** Egalitarianism -0.96

0.03 0.19
Mastery -4.34*** Harmony 0.89

0.00 0.17
Constant 4.80 Constant 11.03***

0.27 0.00
R2 0.48 R2 0.56
standard error 2.02 standard error 1.67
observations 69 Observations 69
The institutional development of a country is described as a function of the various dimensions of national culture using robust regression
to reduce errors caused by outliers.
Let '( be the principal component of six institutional measures: voice and accountability, political stability and absence if violence, gov-
ernment effectiveness, light regulatory burden, rule of law, and freedom from graft. Using a robust regression fit, it is described by
'(

(6)
'(

(7).
In consideration of the bipolarity of the cultural dimensions again, we never include two bipolar dimensions at the same time.
Table 10: Robust regression of national culture and institutional development
55
Dependent Variable: Dependent Variable: Dependent Variable: Dependent Variable:
Independent Variables
Embeddedness (see H1) Autonomy (see H1, H2) Hierarchy (see H5) Harmony (see H2, H6)
-0.28* 0.24**
Pronoun Drop (IV)
0.07 0.03
-0.17*
Second Person Singular Pronoun (IV)
0.10
-0.33***
British Colony (IV)
0.00
0.77***
Embeddedness
0.00
0.22**
Autonomy
0.01
0.32***
Hierarchy
0.00
0.50*** 0.55**
Egalitarianism
0.01 0.00
-0.16 0.59**
Mastery
0.17 0.00
0.51***
Harmony
0.00
3.51*** -0.74 -2.49*** 0.67**

Constant
0.00 0.12 0.01 0.04
R2 0.26 0.72 0.45 0.73

F 5.75*** 41.90*** 13.61*** 62.80***
p 0.00 0.00 0.00 0.00
standard error 0.24 0.34 0.35 0.27
observations 53 53 53 73
adjusted R2 0.22 0.70 0.42 0.72
First stage least squares regressions of cultural dimensions on the instrumental variables and remaining dimensions of
national culture for the cross-section of countries. In consideration of the bipolarity of the cultural dimensions again, we
never include two bipolar dimensions at the same time.
Table 11: First stage regressions of cultural dimensions on instrumental variables
56
Dependent Variable: Dependent Variable: Dependent Variable:
Independent Variables
Corporate Control (H1) Investors Objectives (H2) Takeover Activity (H6)
-0.11*** -0.10** 0.09* 0.08* 0.05** 0.04**
Pronoun Drop (IV)
0.01 0.04 0.07 0.10 0.02 0.03
Second Person
Singular Pronoun (IV)
0.01 0.00 -0.01*** -0.01***

British Colony (IV)
0.97 0.96 0.00 0.00
Embeddedness
0.13 0.11 0.00 0.01

Autonomy
0.04 0.10 0.98 0.15
0.28** 0.28**
Hierarchy
0.03 0.04
0.14 -0.06 0.01 -0.12 -0.10 -0.12 0.03 0.00

Egalitarianism
0.56 0.84 0.84 0.23 0.25 0.17 0.15 0.64
0.06 0.04
Mastery
0.71 0.86
-0.22 -0.13 -0.02* -0.03*

Harmony
0.26 0.54 0.08 0.06
Economic 0.01 0.14 0.06** 0.03 0.02***

Development 0.90 0.17 0.04 0.15 0.00
-0.98** -1.05 0.08 -0.80 0.56** 0.83*** 0.51** 0.65*** -0.09* -0.19***
Constant
0.08 0.19 0.89 0.33 0.01 0.00 0.03 0.01 0.09 0.00
R2 0.35 0.35 0.23 0.28 0.16 0.25 0.14 0.19 0.36 0.53
F 4.41*** 3.18** 2.49* 2.44* 2.35* 3.05** 2.21 2.24 7.28*** 10.59***
p 0.01 0.03 0.08 0.07 0.09 0.03 0.11 0.10 0.00 0.00
standard error 0.04 0.05 0.05 0.05 0.02 0.01 0.02 0.02 0.00 0.00
observations 29 29 29 29 35 35 35 35 43 43
adjusted R2 0.27 0.24 0.14 0.17 0.09 0.17 0.08 0.10 0.31 0.48
Second stage least squares regressions of cultural dimensions on the instrumental variables and remaining dimensions of
national culture for the cross-section of countries. Instrumental variable for Embeddedness (H1) and Autonomy (H1, H2) is
Pronoun Drop. Instrumental Variable for Harmony (H2, H6) is British Colony. In consideration of the bipolarity of the cultur-
al dimensions again, we never include two bipolar dimensions at the same time.
Table 12: Second stage regressions of cultural dimensions on instrumental variables
57
Protection
Corporate Investors Ownership Corporate Takeover
of Minority
Control Objectives Structure Boards Activity
Shareholders
finan- im- neg-
in- out- stra- com- com-
nan- clear weak strong por- ligi- rare
sider sider tegic plex mon
cial tant ble
Embeddedness + -
Autonomy - + - +
Hierarchy - +
Egalitarianism
Mastery
Harmony + - + -
Summary of the empirical results. + indicates a positive impact, - indicates a negative impact of a cultural dimension on a
corporate governance feature.
Table 13: Cultures consequences on corporate governance
58
Embed- Aff. Intell. Egalitaria-
Hierarchy Mastery Harmony
dedness Autonomy Autonomy nism
West Europe + + + +
English-Speaking + + + +
Confucian + + +
South Asia + +
Africa +
Middle East + +
Baltic States + Central Europe + +
Balkan States + East Europe
Latin America
Emergence of distinct cultural regions, which assign similar weights to the different cultural dimensions. + indicates a strong
emphasis on the respective cultural dimension.
Table 14: The distribution of cultural dimensions
59
Sum of Squares Degrees-of-Freedom Mean Squares F-Statistic P-Value
Explained Variance 192.98 8 24.12 7.27 0.00
Unexplained Variance 195.73 59 3.32
Total 388.71 67
Analysis of Variance for with relevant statistics.
Table 15: ANOVA
60
Plot of corporate governance and national culture. The cultural dimensions and the dimensions of corporate governance
are aggregated to a single parameter each.
Figure 1: Plot of corporate governance and national culture
61
Plot of corporate governance and national culture. The cultural dimensions and the dimensions of corporate governance
are aggregated to a single parameter each. Countries are grouped into cultural regions according to Table 14.
14
Figure 2: Cultural regions and corporate governance
62
8
4
Corporate Governance
-2
-4
-6
Africa Latin America English-Speaking West Europe Balkan States + East Europe Confucian Middle East Baltic States + Central Europe South Asia
Boxplots for the variability of among the different cultural regions. The box has lines at the lower quartile, me-
dian, and upper quartile values. Whiskers extend from each end of the box to the 1.5 times the interquartile range. Outliers
are data with values beyond the ends of the whiskers and displayed with a + sign. The width of a notch is computed so that
box plots whose notches do not overlap have different medians at the 5 % significance level.
Figure 3: Boxplots for :;<=>;?
63

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National Culture and Corporate Governance

Wolfgang Breuer* and Astrid Juliane Salzmann+

JEL classification code: A13, G10, G30, N20, Z13

JEL classification code: A13, G10, G30, N20, Z13

corporate governance is basically the outcome of interactions among stakeholders, it needs to be

tant differences might even persist (Licht, 2001).

which again affect corporate governance.

the worldwide diffusion of corporate governance practices.

trol, investors objectives, ownership structure, protection of minority shareholders, corporate

opments in relation to the Schwartz cultural dimensions of Embeddedness, Autonomy, Hierarchy,

mensions of Autonomy, Hierarchy, and Mastery tend towards a market-based system.

characteristics of corporate governance.

2.1 The concept of national culture

they shape social institutions and the general social environment.

be used to derive statistically testable hypotheses about corporate governance systems.

will not distinguish between the two variants of Autonomy.

>>> Insert Table 1 about here <<<

on the values of individual decision-makers. Cultural values constitute a convention of common

ety (Roland, 2004).

systems. In order to offer a comprehensive approach to corporate governance systems, it is impor-

corporate control, investors objectives, ownership structure, protection of minority shareholders,

>>> Insert Table 2 about here <<<

analogously to the proceedings in Licht et al. (2005).

2.2.1 Corporate control

vary in their specific contractual mechanisms (Shleifer and Vishney, 1997).

low control in the market-based system.

H1: In countries with

time horizons and strategies (Aguilera and Jackson, 2003).

characteristics of the opposite system. The hypothesis to be verified is:

2.2.3 Ownership structure

other investors or stakeholders (Prowse, 1994).

institutional/individual shareholders, which pursue financial objectives in an exceptionally self-

determined manner. This yields the following hypothesis:

H3: In countries with

2.2.4 Protection of minority shareholders

tutional/individual shareholders (Aguilera and Jackson, 2003).

shareholders. These considerations make for the following hypothesis:

H4: In countries with

2.2.5 Corporate Boards

and impede any major investments (Prowse, 1994).

This adds up in the hypothesis:

H5: In countries with

2.2.6 Takeover activity

vate agency problems and trigger inefficient actions.

induce a convergence of the interests of management and shareholders.

be initiated. This produces the following hypothesis:

H6: In countries with

porate governance in this section.

3.1 Data on national culture

lies on the data of all 73 countries.

>>> Insert Table 3 about here <<<

3.2 Data on corporate governance

value to GDP from World Economic Forum (2008).

>>> Insert Table 5 about here <<<

3.3 Control variables

use are specified in Table 4.

real GDP per capita.

nent and include it in the regressions.

freedom from graft.

sions of corporate governance, and control variables.

>>> Insert Table 6 about here <<<

a one-standard-deviation increase in Embeddedness would induce a 0.41 0.25 = 0.1025 decrease in

nomically significant as well.

5 Egalitarianism 0.67* -0.07 -0.04 0.74* 1.00

6 Mastery 0.87* 0.12 -0.03 0.70* 0.85*** 1.00

7 Harmony 0.88* 0.12 -0.23 0.55* 0.82* 0.91* 1.00

Macroeconomic 0.62 0.71* Macroeconomic 0.41 0.46

Political -0.27 -0.41 Political -0.44 -0.52*