National cultural effects on leverage decisions: Evidence from emerging-market ADRs

We examine leverage decisions in the context of national culture over the 1996–2010 period. Cultural characteristics can explain capital structure decisions from emerging-markets cross-listings. The results show that firms from countries with high Individualism and Indulgence employ more debt. Firms located in countries with high Power Distance, Masculinity, Uncertainty Avoidance, and Long-term Orientation are less leveraged. Additionally, Exchange-traded and capital-raising ADRs are more likely to be from countries with weaker corporate governance. Univariate tests show that capital-raising ADRs employ less debt relative to non-capital-raising ADRs, and notably, in the post-cross-listing period. Interestingly, the home country's cultural characteristics of capital-raising and exchange-traded ADRs exert less influence on their capital structure decisions. Our findings suggest that there is a value discount associated with increased firm leverage. Our insights have practical implications for portfolio managers attempting to enter emerging markets through the use of ADRs. Moreover, investors can evaluate the often neglected effect of cultural values into firm performance.