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

• Author: Bart Frijns,Olga Dodd,Aaron Gilbert
• DOI: http://doi.org/10.1111/j.1468-036X.2013.12038.x
• Date: 01 September 2015
• Published date: 01 September 2015

On the Role of Cultural Distance

in the Decision to Cross‐List

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

cross‐listing firms. We argue that firms cross‐list in markets with greater cultural

similarities, because 1) investors are more willing to invest in culturally familiar

firms and 2) managers seek to avoid potential conflicts with culturally disparate

investors and managers. Employing Hofstede’s cultural dimensions, we find that

firms from developed countries display greater cross‐listing propensity towards

culturally similar countries. These results are robust to various alternative cultural

measures. We further find that it is mainly the difference in uncertainty avoidance

and individualism that affect cross‐listing decisions.

Keywords: national culture, cultural distance, international cross‐listing

JEL classification: C24, G10

1. Introduction

The incidence of cross‐listing, that is, a firm listing its shares on an exchange outside its

home market, has provoked numerous theories to explain the observed cross‐listing

behaviour, including why firms cross‐list.

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

cross‐listing literature is culture. Culture can be defined 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, 706–741

doi: 10.1111/j.1468-036X.2013.12038.x

© 2013 John Wiley & Sons Ltd

countries and it is these cultural dissimilarities that can affect financial decision making

and outcomes.

2

The importance of cultural distance in finance is highlighted by several

studies. Specifically, studies have shown that cultural distance provides important

explanations for the magnitude of the flow 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 cross‐border 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 find

negative relationships between cultural distance and cross‐border investment flows.

Several studies suggestthat culture plays a role in cross‐listing. In particular, Sarkissian

and Schill (2004) show that firms prefer to cross‐list in markets that are more proximate

either economically,industrially, geographically, or culturally. Licht (2004)further argues

that the extent of legal bonding attained from cross‐listing is significantly 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 cross‐listing decision, including both the impact of the total

cultural differences between countries and the role of specific cultural dimensions.

We argue that the cultural distance between countries is an important determinant for

the choice of host market for cross‐listing. One possible argument is that investors in the

host country may not be willing to invest in firms from culturally dissimilar markets since

they are unfamiliar with these firms (e.g., Grinblatt and Keloharju, 2001; Huberman,

2001). This unwillingness may be anticipated by a cross‐listing firm and may reduce the

propensity to list in culturally dissimilar markets. Alternatively, having investors with

different social norms, beliefs, and cultural values can create conflicts between the

shareholders in the host market and management. Consequently, firms may choose to

cross‐list in culturally similar markets to avoid potential conflict. Both arguments suggest

that culture plays a role in the cross‐listing decision.

We empirically examine the role of cultural distance in the cross‐listing decision by

employing a cross‐listingsdataset 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 cross‐listing decision. To measure cultural distance, we use Hofstede’s

(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

find a strong preferencefor cross‐listing 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 cross‐listing, suchas degree of market

segmentation, differences in liquidity, and economic and financial development. Our

results are robust to different measures of culture and cross‐listing activity.

Second, we examine the impact of differences in Hofstede’s (1980) individual

cultural dimensions –uncertainty avoidance, individualism,power distance, masculinity–

separately and find that not all aspects of culture matter. Specifically, we find 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 Cross‐List 707

differences in uncertainty avoidance

3

have a significantly negative impact on the cross‐

listing decision. This findingis in line with Hofstede’s (1989), who argues that differences

in uncertainty avoidance are most problematic and difficult to overcome, and with the

empirical observation of Barkema and Vermeulen (1997), who show that differences in

uncertainty avoidance significantly reduce the survival probability of international joint

ventures. In addition, we find that a difference in individualism

4

positively affects the

cross‐listing decision, but only if the home market is more individualistic than the host

market. This findingsuggests that firms from individualistic countrieshave a preference for

cross‐listingin 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 find it quite easy to deal with people from outside

their group, whilethis is more difficult for people from collectivistic countries(see Triandis

et al., 1988). Alternatively, it could be attributed to greater managerial overconfidence 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 conflict.

This paper makes several important contributions to the literature on cross‐listing, and

on culture and finance. With regards to the literature on cross‐listing, we extend the

research on the role of culture in cross‐listing decisions. Sarkissian and Schill (2004) show

that the probability of cross‐listing to a particular foreign country increases when

countries share a common official 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 non‐linguistic transmission of cultural knowledge. Similarly,

Guiso et al. (2004) suggest that common language and geographic distance between

countries are measures of information flow and have limited explanatory power on

cultural aspects of economic behaviour. Our findings confirm that cultural distance can

explain the distribution of cross‐listing beyond Sarkissian and Schill’s (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 cross‐list 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 find that differences in uncertainty avoidance matter, in line with

Barkema and Vermeulen (1997), and that differences in individualism have an

asymmetric effect on cross‐listing decisions. Specifically, we observe an increased

tendency for more individualistic countries to cross‐list into more collectivistic countries.

With regards to the literature on culture and finance, we contribute to the debate on the

role of culture on financial 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 overconfidence (Chui et al., 2010).

6

In addition to the impact of culture on financial decision making, studies have examined the

role of culture in explaining a country’s regulatory frameworks (e.g., Stulz and

Williamson, 2003) and corporate governance structures of firms (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