On the Role of Cultural Distance in the Decision to Cross‐List

DOIhttp://doi.org/10.1111/j.1468-036X.2013.12038.x
Date01 September 2015
Published date01 September 2015
On the Role of Cultural Distance
in the Decision to CrossList
Olga Dodd, Bart Frijns and Aaron Gilbert
Department of Finance, Auckland University of Technology, Private Bag 92006 1142,
Auckland, New Zealand
E-mail: olga.dodd@aut.ac.nz;
Abstract
This paper examines the role of culture in the choice of the destination market for
crosslisting rms. We argue that rms crosslist in markets with greater cultural
similarities, because 1) investors are more willing to invest in culturally familiar
rms and 2) managers seek to avoid potential conicts with culturally disparate
investors and managers. Employing Hofstedes cultural dimensions, we nd that
rms from developed countries display greater crosslisting propensity towards
culturally similar countries. These results are robust to various alternative cultural
measures. We further nd that it is mainly the difference in uncertainty avoidance
and individualism that affect crosslisting decisions.
Keywords: national culture, cultural distance, international crosslisting
JEL classification: C24, G10
1. Introduction
The incidence of crosslisting, that is, a rm listing its shares on an exchange outside its
home market, has provoked numerous theories to explain the observed crosslisting
behaviour, including why rms crosslist.
1
However, one issue that is still not well
understood is what drives the choice of host market (Sarkissian and Schill, 2004; Abdallah
and Goergen, 2008). One potential explanation that has been largely overlooked in the
crosslisting literature is culture. Culture can be dened as the collective programming of
the mind that distinguishes the members of one group or category of people from another
(Hofstede, 2001, p. 9). Cultural distance measures the cultural dissimilarities between
We would like to thank John Doukas, two anonymous referees and participants at the
European Financial Management Association Conference (Barcelona, 2012), the Interna-
tional Finance and Banking Society Conference (Valencia, 2012), Multinational Finance
Society Conference (Krakow, 2012) and the Manawatu Seminar Series at Massey
University for helpful comments and suggestions. Correspondence: Olga Dodd.
1
See Merton (1987), Fuerst (1998), Foerster and Karolyi (1999), Errunza and Miller (2000),
Doidge et al. (2004), and Sarkissian and Schill (2004).
European Financial Management, Vol. 21, No. 4, 2015, 706741
doi: 10.1111/j.1468-036X.2013.12038.x
© 2013 John Wiley & Sons Ltd
countries and it is these cultural dissimilarities that can affect nancial decision making
and outcomes.
2
The importance of cultural distance in nance is highlighted by several
studies. Specically, studies have shown that cultural distance provides important
explanations for the magnitude of the ow of both debt (Aggarwal et al., 2012) and equity
(Siegel et al., 2011) between countries, the extent of the home bias (Beugelsdijk and
Frijns, 2010; Anderson et al., 2011), and the degree of crossborder merger and
acquisitions activity (Ahern et al., 2012). These papers examine the impact of cultural
distance on the investment decisions of investors and corporate managers and nd
negative relationships between cultural distance and crossborder investment ows.
Several studies suggestthat culture plays a role in crosslisting. In particular, Sarkissian
and Schill (2004) show that rms prefer to crosslist in markets that are more proximate
either economically,industrially, geographically, or culturally. Licht (2004)further argues
that the extent of legal bonding attained from crosslisting is signicantly affected by the
cultural distance between the home and host countries. In addition, Daugherty and
Georgieva (2011)show that cultural similarity between the home and host countriesaffects
the decision to delist from the US markets. We extend the literature by looking at the role
cultural distance plays in the crosslisting decision, including both the impact of the total
cultural differences between countries and the role of specic cultural dimensions.
We argue that the cultural distance between countries is an important determinant for
the choice of host market for crosslisting. One possible argument is that investors in the
host country may not be willing to invest in rms from culturally dissimilar markets since
they are unfamiliar with these rms (e.g., Grinblatt and Keloharju, 2001; Huberman,
2001). This unwillingness may be anticipated by a crosslisting rm and may reduce the
propensity to list in culturally dissimilar markets. Alternatively, having investors with
different social norms, beliefs, and cultural values can create conicts between the
shareholders in the host market and management. Consequently, rms may choose to
crosslist in culturally similar markets to avoid potential conict. Both arguments suggest
that culture plays a role in the crosslisting decision.
We empirically examine the role of cultural distance in the crosslisting decision by
employing a crosslistingsdataset from 45 home markets to 32 host markets obtained from
Sarkissian and Schill (2012). First, we examine the role of cultural distance between
countries in the crosslisting decision. To measure cultural distance, we use Hofstedes
(1980, 2001) cultural framework and alternative cultural frameworks from Tang and
Koveos (2008), the Global Leadership and Organisational Behaviour Effectiveness
(GLOBE) project, andthe World Values Survey (WVS). For developed home markets,we
nd a strong preferencefor crosslisting in culturally similar markets,even after controlling
for other proximity measures such as shared language, shared legal origin, geographic
distance, and economic and industrialproximity between the host and home countries and
for variables that capture the traditional motives for crosslisting, suchas degree of market
segmentation, differences in liquidity, and economic and nancial development. Our
results are robust to different measures of culture and crosslisting activity.
Second, we examine the impact of differences in Hofstedes (1980) individual
cultural dimensions uncertainty avoidance, individualism,power distance, masculinity
separately and nd that not all aspects of culture matter. Specically, we nd that
2
This may be related to what Huberman (2001) refers to as a familiarity bias, that is, where
investors treat foreign assets differently from domestic ones simply because they are foreign.
© 2013 John Wiley & Sons Ltd
On the Role of Cultural Distance in the Decision to CrossList 707
differences in uncertainty avoidance
3
have a signicantly negative impact on the cross
listing decision. This ndingis in line with Hofstedes (1989), who argues that differences
in uncertainty avoidance are most problematic and difcult to overcome, and with the
empirical observation of Barkema and Vermeulen (1997), who show that differences in
uncertainty avoidance signicantly reduce the survival probability of international joint
ventures. In addition, we nd that a difference in individualism
4
positively affects the
crosslisting decision, but only if the home market is more individualistic than the host
market. This ndingsuggests that rms from individualistic countrieshave a preference for
crosslistingin more collectivistic countries, but not the reverse.This could be due to cross
cultural differences in the way people deal with members that are not part of their group.
People from individualistic countries nd it quite easy to deal with people from outside
their group, whilethis is more difcult for people from collectivistic countries(see Triandis
et al., 1988). Alternatively, it could be attributed to greater managerial overcondence in
individualistic countries
5
(e.g., Daugherty and Georgieva, 2011) or to the notion that
managers from individualistic countries dominate members from collectivistic countries,
who are thus less likely to generate conict.
This paper makes several important contributions to the literature on crosslisting, and
on culture and nance. With regards to the literature on crosslisting, we extend the
research on the role of culture in crosslisting decisions. Sarkissian and Schill (2004) show
that the probability of crosslisting to a particular foreign country increases when
countries share a common ofcial language. However, Bloch (1990) and Street (1993)
highlight the limited role of language as a proxy for culture and suggest that science
should focus more on the nonlinguistic transmission of cultural knowledge. Similarly,
Guiso et al. (2004) suggest that common language and geographic distance between
countries are measures of information ow and have limited explanatory power on
cultural aspects of economic behaviour. Our ndings conrm that cultural distance can
explain the distribution of crosslisting beyond Sarkissian and Schills (2004) proximity
factors, including shared language, shared law, geographic distance, economic and
industrial proximity, and fundamental factors. Hence, the effect of culture on the decision
to crosslist is not merely the result of shared language and/or colonial ties but goes
beyond that and appears to be more complex. Further, we show that not all aspects of
culture matter. We nd that differences in uncertainty avoidance matter, in line with
Barkema and Vermeulen (1997), and that differences in individualism have an
asymmetric effect on crosslisting decisions. Specically, we observe an increased
tendency for more individualistic countries to crosslist into more collectivistic countries.
With regards to the literature on culture and nance, we contribute to the debate on the
role of culture on nancial decision making.
6
The notion that cultural distance negatively
3
Uncertainty avoidance refers to the extent to which people are uncomfortable with uncertain
or unstructured situations.
4
Individualism refers to the degree to which a society emphasises the individual as opposed to
the group.
5
Note that individualism has been linked to overcondence (Chui et al., 2010).
6
In addition to the impact of culture on nancial decision making, studies have examined the
role of culture in explaining a countrys regulatory frameworks (e.g., Stulz and
Williamson, 2003) and corporate governance structures of rms (e.g., Licht et al., 2005)
and the impact of culture in explaining risk aversion (Hilary and Hui, 2009).
© 2013 John Wiley & Sons Ltd
708 O. Dodd, B. Frijns and A. Gilbert

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