National Culture and Corporate Investment Efficiency

This paper explores whether national culture explains the deviation from the optimal investment, as measured by under- and over-investment, and the impact of this deviation across cultural dimensions on shareholders’ wealth. Using an international sample of firms listed in 38 countries, we find that firms from assertive nations over-invest. In contrast, firms from societies with greater male and female equality, higher institutional and in-group collectivism as well as from societies which reward future performance adopt more conservative investment strategies, and ultimately under-invest. In addition, we document for the first time that the deviation from optimal investment harms shareholders’ wealth. We show that under-investment is disliked by investors in most cultures whereas the effect of over-investment on shareholders’ wealth varies across the cultural dimensions. Our results show that national culture plays an essential role in the efficient allocation of investment.