National Culture and Corporate Governance

ABSTRACT This paper examines the influence of national culture on corporate governance. We postulate that national culture can shape the contracting environments by serving as an informal constraint that affects incentives and choices in corporate governance. We hypothesize that national culture can explain cross-country variations in corporate governance after controlling for legal, political, financial, and economic institutions. We develop a Rule Preference Index as a proxy of national culture for a sample of 12,909 firm-year observations from 41 countries. Employing a hierarchical linear modeling approach to isolate the effects of firm-level and country-level variables, we find robust evidence that firms (and countries) with a higher Rule Preference Index tend to have better corporate governance.