National Culture and the Regulation of Corporate Self-Dealing

National Culture and the Regulation of Corporate Self-Dealing
Brandon N. Clinea,* and Claudia R. Williamsonb
January 3, 2015
a, *
Mississippi State University
Department of Finance and Economics
P.O. Box 9580
Mississippi State, MS 39762
Email: [email protected]
Corresponding author: Phone: (662)325-7477 Fax: (662)325-1977
b
Mississippi State University
Department of Finance and Economics
P.O. Box 9580
Mississippi State, MS 39762
Email: [email protected]
National Culture and the Regulation of Corporate Self-Dealing
Abstract
The economic impact of corporate self-dealing and the regulation against such activities varies
considerably across countries. In this work, we examine the influence national culture has on
shareholder protection. We hypothesize that culture can impact self-dealing through two channels.
First, culture may indirectly impact shareholder protection, as formal regulations evolve from culture.
Alternatively, cultural norms may exist that directly deter self-dealing, thus substituting for formal
regulation. To test these hypotheses, we examine the association between a country’s anti-self-dealing
index and different types of trust, attitudes toward cheating, and personal beliefs including
responsibility, tolerance, and respect. We find that trust in strangers and personal values negatively
relate to formal self-dealing regulation. We further find these culture measures positively relate to a
healthy financial system. We interpret this as evidence that culture can provide an alternative
mechanism for shareholder protection.
JEL: G38; K22; P51; Z13
Keywords: Culture; Informal institutions; Shareholder protection; Anti-self-dealing; Corporate
governance
1. Introduction
When shareholders supply capital to the firm, they delegate to managers the day-to-day
responsibility for the uses of those resources. Managers thus, at their own discretion, may deploy these
funds to benefit themselves at the expense shareholders. This self-dealing undermines shareholder
confidence in financial markets and results in an inefficient transfer of capital and stymied economic
development.1,2
Recent studies emphasize that differences in investor protection across countries impact the
ability of managers to expropriate shareholder wealth (e.g., Shleifer and Vishny, 1997; La Porta et al.,
1997; Shleifer and Wolfenzon, 2002). La Porta et al., (1998) along with Djankov et al. (2008) explain
this variation in investor protection by examining differences in formal rules and regulations designed
to limit self-dealing.3 Largely unexplored, however, is how informal rules may also influence investor
protection. Griffin et al. (2014) emphasize that focusing on the standardization of formal regulation
across countries ignores informal institutions. Instead, formal governance policies must be considered
jointly with national culture, a view consistent with emerging studies in the culture and finance
literature (i.e., Khanna et al., 2006; Reuter, 2011).
In this paper, we explore how national culture influences shareholder protection against the
self-dealing of corporate insiders. Two potential channels are identified. First, we hypothesize that
culture can indirectly influence shareholder protection, as formal regulations limiting self-dealing
evolve from informal cultural attitudes and norms. We also conjecture that culture can directly provide
shareholder protection by imposing internal and external constraints on individual behavior which
deter self-dealing.
1
Jensen and Meckling (1976) refer to this economic loss generally as the “residual loss” resulting from gains from trade neglected
due to the agent’s lack of proper incentives.
2 Chen et al. (2009) document that better corporate governance practices are compensated by lower costs of capital.
3 In addition to country-level regulation, firms often adopt corporate governance policies through the organization of boards and
incentive-based compensation. Not surprisingly, by aligning the interests of managers with shareholders, these practices are
linked to firm performance (La Porta et al., 2002; Klapper and Love, 2004; Durnev and Kim, 2005). 2
To test theses conjectures, we empirically examine the association between national culture
and the country-level anti-self-dealing index. This index, developed by Djankov et al. (2008), measures
formal legal rules of minority shareholder protection against the expropriation by corporate insiders.
National culture measures are created using questions from the World Values Surveys (hereafter,
WVS). Three culture areas are explored. The first area measures how trustworthy an individual
perceives others. Three types of trust are examined: generalized trust, trust in people you know, and
trust in strangers. The second cultural dimension captures individuals’ attitudes toward cheating. The
third captures personal values that an individual believes are important, including attitudes toward
responsibility, respect for authority, respect for others, and tolerance.
Our evidence supports that culture is a significant determinant of the formal rules limiting the
self-dealing of insiders. Specifically, both trust in strangers and personal values are significantly and
negatively related to the anti-self-dealing index. A one standard deviation increase in either culture
measure reduces the anti-self-dealing index by approximately a one-third standard deviation. These
results are robust when controlling for endogeneity and other determinants, such as legal origin,
income, institutional quality, and economic factors. This negative association suggests that culture
potentially substitutes for formal regulation.
Supporting the substitution argument, we further find that our measures of culture positively
relate to a healthy financial system. Specifically, trust in strangers is positively associated with market
capitalization, number of firms per capita, IPOs to GDP, share turnover, private sector credit, and GDP
per capita, and it is negatively associated with the benefits of private control and ownership
concentration. Personal values positively relate to the number of firms, share turnover, private sector
credit, and GDP per capita, and are negatively associated with the benefits of private control and
ownership concentration. Thus, while these culture-based measures negatively impact formal
shareholder protection on the books, we find that they are positively related to measures of a healthy
3
financial system. We interpret this as evidence that cultures rich in anonymous trust and personal
values serve as a substitute for formal shareholder protection.
These findings contribute to the literature at the intersection of culture and finance. Prior
studies examine the determination of country-level financial regulations. Licht et al. (2005) show that
culture predicts creditor and shareholder protection. Specifically, cultures that minimize uncertainty
and promote social harmony have less financial regulation. Our results are similar in that we also find
a negative association between culture and regulation; however, we test measures related to uncertainty
and social harmony and find no significant association with the anti-self-dealing index. La Porta et al.
(2008) show that legal origins and income per capita strongly predict the anti-self-dealing index. They
also examine the link between legal origin, culture, and creditor rights. Only two of their eleven
measures of culture are significant. Our results differ as we find a robust relationship between our
measures of culture and shareholder protection. Our findings are consistent with this work, in that
culture augments rather than replaces legal origin in explaining regulation.4
Griffin et al. (2014) examine how national culture impacts firm-level governance. They find
culture influences the adoption of ‘good’ corporate governance and that these practices are linked to
positive performance. Other work supports these findings. Li et al., (2013) and Shao et al., (2013)
document that culture influences financial outcomes by impacting attitudes toward risk. Nash and Patel
(2013) find that, due to agency issues, culture influences the preferences of investors supplying capital.
Supporting this view, culture is linked to access to financing (Aggarwal and Goodell, 2014) and foreign
investment decisions (Aggarwal et al., 2012). Consequently, culture is shown to impact dividend policy
(Shao et al., 2010), corporate debt maturity (Zheng et al., 2012), and capital structure (Chui et al., 2002;
Li et al., 2011).
4
Stulz and Williamson (2003) present evidence of a causal relationship between religious affiliation and investor protection. They
show Protestant countries support creditor rights better than Catholic countries; however, religion does not predict shareholder
rights. In Section 4.3, we utilize their conceptual arguments and use religion as an instrument for our measures of culture.
4
We view our findings as complementary to these works, as our measures of culture, anonymous
trust and personal values, lead to less formal regulation of self-dealing. We expand upon these findings
by first outlining a conceptual framework describing why culture may impact investor protection and
financial markets. Perhaps the greatest distinction between our work and previous literature is that we
empirically link our measures of culture negatively to formal shareholder protection, yet these culture
measures positively predict financial market development. We, therefore, conclude that culture can
provide an alternative mechanism for shareholder protection. Collectively, these results have several
implications. First, they support other evidence in the literature suggesting that culture within a country
plays a significant role in determining regulation. Second, they imply that shareholder protection can
emerge naturally in countries fostering a culture of trust and personal values and that these influences
can serve as a substitute for formal rules limiting self-dealing. Finally, these results highlight that there
exists a variety of ways of achieving investor protection and that formal rules regarding shareholder
rights should be considered jointly with a nation’s culture.
2. Conceptual Framework
To provide a theoretical link between informal cultural norms, formal investor protection, and
financial outcomes, we create a conceptual framework as presented in Figure 1. Arrow A identifies the
connection between formal investor protection and financial outcomes. Arrows B and C define two
possible avenues for culture’s influence on financial markets. Arrow B identifies the indirect
association where culture influences formal shareholder protection, thereby impacting financial
outcomes via government regulation. Arrow C identifies culture’s direct effect on financial outcomes
via alternative channels other than culture’s impact on formal rules. We briefly discuss these
conceptual links below to provide a theoretical basis for our conjecture that culture can impact financial
outcomes by offering an alternative mechanism to government regulation. We recognize that this
framework is not comprehensive, as it does not consider feedback loops, reverse causality, or
5
optimality. Instead, we rely on the figure to simplify the theoretical discussion and provide clarity to
how culture can impact financial markets. Empirical tests in the sections below addresses these other
concerns.
[Insert Figure 1 Here]
It is well established that formal regulation of investor protection leads to financial
development (e.g., Shleifer and Vishny, 1997; La Porta et al., 1997, 1998; Shleifer and Wolfenzon,
2002). These studies emphasize that differences in investor protection across countries impact the
ability of managers to expropriate shareholder wealth. La Porta et al. (1998) create an index of antidirector rights to proxy for minority shareholder protection and relate the index to economic and
financial outcomes.5 In a follow-up, Djankov et al. (2008) develop a theoretically based measure of
legal protection of minority shareholders against expropriation by corporate insiders. They illustrate
that these measures of formal self-dealing regulation positively relate to financial development as
measured by market capitalization, control premiums, the number of public firms, IPOs, and ownership
concentration. La Porta et al. (2008) confirm this positive association between formal investor
protection and financial outcomes. In Figure 1, we illustrate this association with Arrow A.
We argue that culture can impact financial outcomes either directly or indirectly. The indirect
association may be linked through culture’s impact on investor protection regulation. Figure 1, Arrow
B represents this association. A positive sign on Arrow B is well supported by economic theory. As
defined by North (1990), institutions are ‘rules of the game,’ both formal and informal, which govern
actions through incentives. Formal institutions are codified rules, whereas informal institutions include
cultures, norms, and conventions enforced by social custom. Consistent with this view, Williamson
(2000) adopts a historical perspective explaining how institutions evolve. He argues that culture can
affect economic outcomes indirectly by influencing legal rules and regulation. Recent empirical studies
5
For a counter argument, we note that Coffee (1999) and Spamann (2010) are critical of this measure of minority shareholder
protection. 6
show that culture shapes formal institutions by underpinning democracy and protecting property rights
(Guiso et al. 2006; Licht et al. 2007; Williamson and Kerekes 2011). In addition, Griffin et al., (2014)
show that national culture influences the adoption of firm-level governance policies.
An alternative, however, is that Arrow B is negative, suggesting informal institutions substitute
for formal rules. Williamson (2005) illustrates that cultural norms provide internal constraints on
individual behavior, suggesting that culture may limit opportunistic behavior in private dealings, thus
lessening the need for formal protection. Stringham (2011) suggests that religious beliefs instill a sense
of morality, thereby reducing the propensity to expropriate wealth from others. In these cultures,
individuals may not demand formal regulation to prevent others from self-dealing; thus, culture
provides a substitute for formal rules.
In addition to the internal constraints cultures impose, a negative sign on Arrow B might also
be explained by the external disciplining effect that culture has on individual behavior. For example,
trust and reputation can enforce contracts and protect property rights (Greif, 1993; Fukuyama, 1996;
Leeson, 2007a). Networks based on ethnicity or religion can also encourage contract enforcement
(Landa 1981; Leeson 2008). Posner (2002) and Ostrom (1990) illustrate how a system of elaborate
norms encourage cooperation among group members. These examples illustrate how cultures facilitate
alternatives to formal government regulation.
Theory supporting the direct association between culture and financial outcomes, Arrow C,
dates back to Weber’s (1930) spirit of capitalism, which he defines as the attitude (i.e. culture) that
strives for profit.6 Recent scholars highlight the direct connection between culture and financial
outcomes. One avenue for culture’s influence is through the alteration of attitudes toward risk (Chui
and Kwok, 2008; Aggarwal and Goodell, 2013; Li et al., 2013; Shao et al., 2013). Specifically,
Lievenbrück and Schmid (2014) find that culture impacts the hedging behavior of firms. Hilary and
6
Empirical studies supporting Weber’s hypothesis include Grier (1997), Barro and McCleary (2003), and Tabellini (2010).
7
Hui (2009) show that firms located in more religious areas have lower capital and R&D investment.
These firms also have a lower propensity to engage in unethical behavior. For example, McGuire et
al., (2012) find religiosity negatively relates to accounting irregularities and accruals management.
These firms are also less likely to backdate options, pay excessive compensation, face class action
lawsuits (Grullon et al., 2010), and hide bad news from the market (Callen and Fang, 2013).
Culture is also shown to impact financial outcomes through other means. For example,
Aggarwal and Goodell (2014) find that more risk averse and competitive cultures have less access to
financing. Countries with conservative cultures likewise have lower corporate debt ratios (Chui et al.,
2002). Furthermore, trusting societies have greater stock market participation (Guiso et al., 2008) and
those grounded in equality have higher rates of ownership concentration (Holderness, 2014). Also,
Chui et al. (2010) argue that countries with more individualism are more likely to experience
momentum profits. In collectivist cultures, Zheng et al., (2013) find bank officers favor relationships
instead of adhering to rules.7
We combine the idea that culture can substitute for formal rules (negative sign on Arrow B)
and culture can support financial development (positive sign on Arrow C) to argue that culture provides
shareholder protection. Under this scenario, formal regulation to minimize self-dealing is redundant
and therefore not demanded; however, since shareholder protection against self-dealing is provided
informally, financial market development is not thwarted. This argument is supported empirically in
the literature. For example, Allen et al. (2005) document substantial growth in the Chinese private
sector despite the absence of a strict legal system. They assert that business culture and social norms
play a large role in facilitating growth. Furthermore, Allen et al., (2012) find that despite a lack of
investor protection from the legal system, India has experienced remarkably high growth due to a
reliance on ‘informal and extra-legal mechanisms’.
7
Culture has also been shown to impact the structure of financial systems. For example, national culture shapes the choice of a
stock market versus a bank-based system (Kwok and Tadesse, 2006; Aggarwal and Goodell, 2009).
8
3. Data
This section discusses the measurement of key variables, including the regulation of selfdealing and culture. Information on the remaining variables are provided in Appendix A.
3.1. Anti-Self-Dealing Index
Following Djankov et al. (2008), we measure the regulation of self-dealing with the anti-selfdealing index. This index measures the strength of minority shareholder protection against self-dealing
by controlling shareholders. The index is designed to capture legal transactions where the controller of
a company makes choices to benefit himself at the expense of other investors. It is not designed to
capture corporate crime; instead, it measures the difficulty for minority shareholders to prevent selfdealing or to recover damages if a controlling shareholder decides to enrich himself while following
the law.
Djankov et al. (2008) collect data across countries by developing an artificial self-dealing
transaction between two firms, controlled by the same person, which can in principle be used to
improperly enrich that individual. In order to collect standardized legal responses, they team up with
Lex Mundi law firms to code how each country’s legal system would regulate such a transaction. These
regulations are classified as rules designed to incentivize good behavior, such as extensive disclosure,
approval procedures for transactions, and facilitation of private litigation.
An ex ante anti-self-dealing index is constructed by extracting the first principal component of
approval by disinterested shareholders, disclosures by buyer, disclosures by controlling shareholder,
and whether an independent review is required. The second group of regulations captures ex post rules
based on ease of proving wrongdoing, including acquiring access to evidence and ex post disclosures.
The ex post anti-self-dealing index is constructed from the first principal component of disclosures in
periodic filings, standing to sue, rescission, ease of holding controlling shareholders liable, ease of
9
holding the approving body liable, and access to evidence. The overall anti-self-dealing index is the
combination of both the ex ante and ex post indices.8
The overall anti-self-dealing index can be interpreted as the formal regulations ‘on the books’
designed to protect minority shareholders. This approach essentially measures the hurdles that the
controlling shareholder must clear in order to get away with such a transaction. The more hurdles, the
higher score a country receives on the anti-self-dealing index. The higher the score, the more
regulations a country has adopted to protect against self-dealing. All three anti-self-dealing indices are
scaled from zero to one. The anti-self-dealing index is our primary dependent variable of interest as it
includes a comprehensive set of regulations. We do, however, explore determinants of the ex ante and
ex post anti-self-dealing indices.
3.2. Culture Measures
To test our conjectures, three measures of culture, including trust, attitudes toward cheating,
and personal values, are developed using the last three waves (1999-2014) of WVS. We focus our
measures of culture on specific traits that are likely to impact regulation. We argue that each measure
relates to investor protection by influencing individual’s perception of and willingness to engage in the
expropriation of shareholder wealth. Therefore, this impact can lead to formal regulation to prevent
such behavior or provide informal governance that substitutes for formal rules of law.
Our first culture measure is trust. Trust is perhaps the most direct connection to investor
protection as it reduces transactions and monitoring costs (Williamson, 1975). One major cost when
attempting to engage in exchange is the inability to write complete contracts covering all outcomes.
However, trust can serve as an informal intermediary when issues or implicit breaches arise. This
facilitates exchanges that otherwise would not take place. (Guiso et al., 2009). Empirical evidence
8
The anti-self-dealing index is constructed from the first principal component of: (1) approval by disinterested shareholders; (2)
disclosures by buyer; (3) disclosures by controlling shareholder; (4) independent review; (5) each of the elements in the index of
disclosure in periodic filings; (6) standing to sue; (7) rescission; ease of holding controlling shareholder liable; (8) ease of holding
the approving body liable; and (9) access to evidence. 10
suggests that trusting societies experience higher levels of economic development (Knack and Keefer,
1997; Zak and Knack, 2001; Francois and Zabojnik, 2005).
This logic may likewise hold between trust and financial regulation. Carlin et al. (2009) argue
that trust and regulation are substitutes in financial markets. Supporting evidence is provided by
Aghion et al. (2010), who show a strong negative association between trust and measures of market
regulation, and Pinotti (2012) who finds that distrust predicts more regulation. Furthermore, trusting
societies may be less likely to behave opportunistically. Therefore, a culture that embodies natural trust
might avoid mandating legal rules that restrict financial exchange. In this environment, trust becomes
a substitute for laws and regulations protecting investors. Alternatively, trust may be written into
formal regulation as cultures instill through law those principles they naturally hold as essential.
We measure trust with three different variables, including generalized trust, trust in people you
know, and trust in strangers. The most common proxy of trust, generalized trust, is measured by the
percentage of respondents who answered ‘yes’ to the question ‘do you think most people can be
trusted’. To capture trust in people you know, three additional questions from WVS are used. These
are measured as the percentage of respondents answering ‘yes’ to the questions ‘do you trust your
family’, ‘do you trust people you know personally’, and ‘do you trust people from your neighborhood’.
The last type of trust, trust in strangers, is also measured from three different questions. It includes the
percentage of the respondents saying they ‘trust people they meet for the first time’, the percentage of
the respondents saying they ‘trust people of another religion’, and the percentage of the respondents
saying they ‘trust people of another nationality’.
The second measure of culture explores attitudes toward cheating. This measure is intuitively
linked to protection from expropriation as it directly captures individuals’ views on the ethos of
duplicitous behavior. A national culture more accepting of cheating is likely to accept expropriation of
minority shareholders. As such, these cultures may not provide informal means of protection and rely
more heavily on formal rules to limit such behavior. Alternatively, they may not find it important to
11
create formal regulation to prevent self-dealing since it is culturally acceptable to cheat one another
(Greif, 1994). Four questions from WVS are examined. We use the mean score for each question
asking, on a scale of 1 to 10 (with 10 being always justifiable), is it ever justifiable to avoid bus fare,
claim unentitled government benefits, cheat on taxes, or accept a bribe.
For the last culture measure, we rely on several proxies for personal values, including attitudes
toward responsibility, authority, respect, and tolerance. Responsibility teaches individuals that they are
ultimately responsible for what happens in their lives. Individuals in this type of culture tend to be
more entrepreneurial and have a stronger incentive to develop means of property protection either
formally or informally (Gorodnichenko and Roland, 2013). Respecting authority can impact financial
regulation by instilling confidence in corporate leaders. If so, minority shareholders would not be
overly concerned that managers will engage in wealth expropriation. Both tolerance and respect
captures differing mentalities regarding opportunistic behavior (Banfield, 1958). Some societies
condone engaging in highly opportunistic behavior outside the group or network, while others promote
social interactions beyond networks (Platteau, 2000; Tabellini 2010). Similar to trust, these values can
facilitate shareholder protection, as individuals believe their investment is less likely to be confiscated.
Four questions from WVS are employed to capture each value: the percentage of respondents
answering ‘it is important to teach children a feeling of responsibility’, ‘it is important to teach children
tolerance and respect’, the percentage of respondents answering ‘greater respect for authority is a good
thing’, and the mean score to ‘is homosexuality ever justifiable’. The last question represents greater
social tolerance for individual choices (Berggren and Elinder, 2012).
3.3. Control Variables
As shown in La Porta et al. (2008), laws on the books, including self-dealing regulation, are
heavily influenced by a country’s legal system represented by legal origins. A country’s legal origin is
classified by its respective tradition: English, German, French, or Scandinavian. The data is collected
from La Porta et al. (2008). This most recent classification no longer distinguishes legal origins by
12
socialist tradition. Instead, former socialist countries are reclassified as either German or French
according to the primary historical influence on their new legal system. The empirical model
specifications include French, German, and Scandinavian legal origins, omitting English legal origin
(Djankov et al., 2008; La Porta et al., 2008).
In addition to legal origins, all specifications control for income per capita measured by log
gross domestic product per capita (PPP, constant 2011 international dollar) collected from World
Development Indicators (2014) for the most recent year in which data is available. We also include a
variety of additional controls, including measures of institutional quality and economic indicators. As
robustness, we check our results with alternative measures of culture and an alternative measure of
investor protection. All data is described in appendix A.
3.4. Summary Statistics
Table 1 presents the summary statistics for our primary variables of interest. The anti-selfdealing index is available for 71 countries in our sample; however, our main culture variables and
controls are available for a smaller subset of countries. Therefore, our number of observations varies
depending on the specification and number of controls. The anti-self-dealing index ranges from 0.08
to 1.00, with a mean of 0.44 and a standard deviation of 0.24. Singapore ranks the highest with the
most formal legal regulations against self-dealing. Ecuador scores the lowest on the anti-self-dealing
index. Russia scores at the mean.
[Insert Table 1 Here]
Generalized trust has a mean of 26%, standard deviation of 16.9%, and ranges from 3.2% to
73.7%, with the Philippines recording the lowest and Norway the highest percent of individuals
believing most people can be trusted. Norway also records the highest trust in people they know
personally, people from their neighborhood, and people from a different religion or nationality. Egypt
records the highest trust in family and Ghana has the lowest; however, the mean is about 97% with a
standard deviation of only 2.4%. Ecuador records the lowest trust in people they personally know,
13
which has a mean of 78.4% and standard deviation of 14.2%. Peru has the lowest trust in neighbors
(mean is 34%) and people they meet for the first time (mean is 5.4%). China has the lowest trust in
people from another nationality of 8.8%.
Regarding cheating, the mean for each question ranges from 1.86 to 2.29, with standard
deviations ranging from 0.49 to 1.05. This suggests that, on average, most do not find cheating
justifiable. Countries recording the most acceptances for cheating include Mexico, Philippines, Brazil,
and India. Counties with the least tolerance for cheating include the Netherlands, Jordan, Italy, Ghana,
Japan, and Romania.
Our four proxies for personal values vary considerably across countries. Individual
responsibility has a mean of 71.54% and a standard deviation of 13.4% ranging from 26.4% (Hong
Kong) to 90.8% (Netherlands). Respect ranges from 14.2% to 91.7% with a mean of 68.7% and a
standard deviation of 13.95%. Hong Kong, Korea and China rank the lowest and Sweden, Norway,
and Switzerland score the highest. Respecting authority has a mean of 57.1%, standard deviation of
22.42%, and range between 4.7% (Japan) to 94.5% (Ghana). Tolerance has a mean of 3.87 and standard
deviation of 1.97. Tunisia, Ghana, Morocco record the lowest tolerance and Norway, the Netherlands,
and Sweden have the highest.
The average income per capita across our sample is about $18,200 and equivalent to the
average income in Portugal. The standard deviation is approximately $18,737, with a range from $400
(Uganda) to $79,078 (Luxembourg). Included in our sample are 22 English, 30 French, 13 German,
and 5 Scandinavian legal origin countries.
4. Empirical Analysis
The analysis is limited to cross-country OLS regressions as the anti-self-dealing index is not
available over time. This is a common issue when analyzing cross-country data (i.e., Stulz and
Williamson, 2003; La Porta et al., 2008). Due to the limited nature of the data, we recognize potential
14
reverse causality and endogeneity; therefore, we emphasize the difficulty in claiming strong causal
inferences. To potentially overcome this bias, we use instrumental variable estimation in a later section
discussed below.
4.1. Benchmark Specifications
We begin by examining the effect of culture on anti-self-dealing regulation by testing how each
specific question from WVS relates to the anti-self-dealing index. Legal origins and income per capita
are included in each specification. Table 2, Panel A reports models including measures of trust as the
primary independent variable of interest. An interesting result emerges. Only a specific type of trust,
trusting in strangers, is significant. As shown in column (1), generalized trust is not significant.
Columns (2)-(4) report that trusting in people you know, as measured by trust in family, people you
know personally, or your neighbors, respectively, does not significantly relate to anti-self-dealing
regulation. However, all three measures of anonymous trust, as shown in columns (5)-(7) and measured
by trusting people you meet for the first time, people of another religion, and people of another
nationality, significantly reduce anti-self-dealing regulation. For example, a 20 percentage point
increase in trust in someone you meet for the first time (column 5) decreases the anti-self-dealing index
by about 0.14, equivalent to over a one-half standard deviation decrease. An increase in either trust
other religion or trust other nationality by 20 percentage points decreases the anti-self-dealing index
by about a one-third standard deviation.
[Insert Table 2 Here]
Despite the fact that generalized trust is one of the most robust predictors in the social capital
and culture literature (Knack and Keefer, 1997; Zak and Knack, 2001; Aghion et al., 2010; Tabellini,
2010), it does not significantly relate to anti-self-dealing. This implies that a culture of generalized
trust does not impact self-dealing regulation; however, trust in strangers does significantly reduce these
formal regulations. Thus, a specific form of trust, trusting in others whom you do not know personally,
can substitute for formal rules.
15
Table 2, Panel B reports the impact that cheating attitudes and personal values have on selfdealing regulation. Columns (1)-(4) show that tolerance for cheating is insignificant. This result is
somewhat surprising considering cheating is intuitively linked to opportunistic behavior. This lack of
significance could be due to minimal cross-country variation in cheating attitudes. As shown with the
summary statistics in Table 1, most individuals in almost all countries consider cheating unjustifiable.
Columns (5)-(8) report the findings using our cultural measures regarding personal values. As
shown, all four measures significantly reduce the anti-self-dealing index. Increasing the importance of
teaching children the feeling of responsibility (column 5) by one standard deviation reduces the antiself-dealing index by about a one-third standard deviation. A one-standard deviation increase in
authority, respect, or tolerance reduces the anti-self-dealing index by about a one-quarter standard
deviation.
Collectively, these results suggest that a culture grounded on anonymous trust and one with
strong personal values significantly reduces the formal regulation designed to limit self-dealing. In
addition, an examination of R-squareds reveals that culture explains a large portion of the variation in
self-dealing regulation. Consistent with La Porta et al. (2008), all three measures of civil legal origins
are negative and highly significant in all regressions and income per capita is positive and significant
in all but one.
Moving forward, we refrain from examining generalized trust, personal trust, and cheating
attitudes due to their insignificance. Given the importance of anonymous trust and personal values, we
develop two aggregate indices. The trust index is based on the first principal component from trust first
time, trust other religion, and trust other nationality. The higher the score on the trust index implies
more people find strangers trustworthy. The values index is comprised of the first principal component
from responsibility, authority, respect, and tolerance, with a higher score representing a country richer
in personal values.
16
In Table 3, we transition to using our two aggregate culture indices. We use three dependent
variables to gain deeper insight into culture’s impact on specific regulations: the anti-self-dealing
index, the ex ante index, and the ex post index. The first two columns support the findings from Table
2. Both culture indices are negative and significant, with similar size effects. A one standard deviation
increase in the trust index or the values index reduces the anti-self-dealing index by approximately
0.38 to 0.43 standard deviations, respectively. For example, moving from the lowest to the highest
ranking country on the trust index, the difference between Peru and Norway, reduces the anti-selfdealing index by about 0.30, which is the difference between Singapore (highest ranked) and the United
States.
[Insert Table 3 Here]
Columns (3)-(6) explore the sub components of the anti-self-dealing index, the ex ante index,
and the ex post index. Columns (3) and (4) use the ex ante self-dealing index as the dependent variable.
We find similar results, as both culture indices are negative and significant. This suggests that culture
reduces formal regulations pertaining to activities before the transaction. In other words, a culture with
more trust in strangers or personal values does not require extensive disclosures, approval by minority
shareholders, or an independent review before a transaction takes place. This finding offers support to
our theoretical argument that in certain cultures people do not believe that most individuals will cheat
them when provided the opportunity; therefore, those cultures do not require extensive legal code to
prevent such behavior.
In columns (5) and (6), however, culture does not significantly relate to ex post measures to
regulate self-dealing. Combined, these results suggests a country may rely more on its culture to
minimize self-dealing beforehand but finds these informal means insufficient to prove wrongdoing or
recover losses after a transaction has taken place. Thus, regardless of the level of trust or personal
values, once self-dealing has occurred, explicit legal provisions may be required to recover damages.
17
4.2. Main Specifications
Next, we present our main model specifications including a variety of institutional and
economic controls to test the robustness of our findings. In Table 4, we include a variety of institutional
controls. First included is a measure of democracy from Polity IV (Jaggers and Marshall, 2000).
Arguably, democratic institutions lead to better rules and regulations supporting economic exchange
(Djankov et al., 2002). Democracies are more likely to reflect public opinion and preferences toward
policy. Thus, democratic institutions may foster regulations that directly prohibit self-dealing. In our
results, democracy is insignificant; the culture variables remain significant with slightly higher
coefficients.
[Insert Table 4 Here]
Next, we include two measures from the Worldwide Governance Indicators, control of
corruption and regulatory quality (Kaufmann et al., 2013). It is plausible that a country lacking control
over public corruption would be less likely to create regulations minimizing corporate ‘corruption’.
We find a significant positive association between controlling corruption and the anti-self-dealing
index in one out of two specifications. Regulatory quality is also positive and significant in one
specification. Importantly, culture remains negative and significant in all specifications. Lastly, we
include an exogenous measure of institutional quality. Distance from the equator, or latitude, is an
exogenous geographic measure that is linked to institutional quality through its effect on colonization
and institutional transfer (Hall and Jones, 1999; Williamson and Kerekes, 2011). Latitude is
insignificant but culture remains significant.
In the last two specifications, we control for all five measures of institutional quality. The trust
index and values index remain negative and significant at better than the five percent level. Democracy
is negative and significant in the specification that includes trust; regulatory quality is positive and
significant is both specifications. This is not surprising given that our index is measuring regulations
18
to minimize self-dealing, or ‘good’ regulations. According to the R-squareds, our specifications
explain from 46% to 68% of the variation in self-dealing regulation across countries.
In Table 5, we include basic economic controls for additional robustness. These include the
freedom to trade (Gwartney et al., 2013), unemployment and economic growth (World Development
Indicators, 2014), average years of schooling (Barro and Lee, 2001), log of newspapers and periodicals
in circulations per 1,000 (Djankov et al., 2008), and ethnic fractionalization (Alesina et al., 2003).
In all specifications, both measures of culture are negative and significant. We control for
freedom to trade internationally, as openness to trade may impact the relative payoffs to developing
better financial regulations (Stulz and Williamson, 2003). This measure captures openness based on
trade restrictions. We do not use actual trade as this could depend on investor protection. In columns
(1) and (2), trade openness is insignificant while culture remains significant.
[Insert Table 5 Here]
In columns (3)-(6), we include unemployment and economic growth as proxies for
macroeconomic stability. In all four regressions, culture is negative and significant. Unemployment is
insignificant. Growth, however, is positive and significant in both specifications. This is not surprising
as growing economies not only can afford better regulations but also may demand rules protecting
investors. In columns (7) and (8), we include average years of schooling. It is insignificant in both
specifications, while culture retains its respective relationship.
Newspapers circulation is negative and significant in both specifications. For example, in
columns (9) and (10), a one standard deviation increase in newspaper circulation reduces the anti-selfdealing index by a magnitude similar to that of the trust index and values index (approximately 0.10).
Interestingly, this result suggests that reputational costs through media exposure may substitute for the
need of formal self-dealing regulation. If the public can be made aware of such activities through media
access, individuals are less incentivized to self-deal and thus the need for formal regulation is lowered.
19
Grinblatt and Kelpharju (2001) find that the ethnic origin of investors determines stock
holdings, highlighting a ‘home bias’ across investors. Therefore, ethnicity may influence the manner
in which investors demand protection. A measure of ethnic fractionalization is included in regressions
(11) and (12). It is not significant. Lastly, we include all economic controls simultaneously. Culture
remains negative and significant with similar size coefficients as in previous results. Based on the
adjusted R-squareds, the specifications explain 49% to 74% of the variation in self-dealing regulation.
4.3. 2SLS with IV estimation
The coefficients for the relationship between culture and self-dealing regulation reported above
potentially suffer from biased estimation. As argued by Bowles (1998), cultural values may be
influenced by a wide variety of social phenomena, including economic and political influence, leading
to possible endogeneity concerns. For example, some third factor that we have not controlled for may
influence both the regulation of self-dealing and culture. Davis (2006) argues that economic
globalization may alter traditional social norms and values. As such, culture may be endogenous and
the estimates identified above cannot be interpreted as causal effects. A specific endogeneity concern
is reverse causation. For example, greater regulation of self-dealing may increase the ability to trust
strangers, supporting a positive reinforcement effect. However, in our particular case, trust and values
are negatively related to provisions to limit self-dealing. Thus, it is unlikely that reverse causation is
driving our results.9
In Table 6 we address these potential concerns by estimating two-stage least squares
regressions. In particular, we instrument for culture using historic religion measures identified in the
literature (McCleary and Barro, 2006). Stulz and Williamson (2003) argue that religion impacts
financial regulation by influencing values, as religion is a key component of one’s belief system. For
9
Another potential source of bias is due to measurement error associated with the use of survey data. Differences in the
interpretation of survey questions may lead to classical measurement error, resulting in attenuation bias. In addition, survey data
are subject to measurement error due to cognitive errors and to the perceived social desirability of particular answers. As Bertrand
and Mullainathan (2001) point out, these sources of error will tend to bias regression results when survey data is used as an
explanatory variable. 20
example, Protestantism supports individual determination, emphasizing that individuals are
responsible for their actions and must honor contracts entered into by their own free will. With this
thinking, there is no role for legal authority to alter contracts or prevent individuals from entering into
contracts. Previous work uses religion as instruments for cultural beliefs (i.e., Guiso et al., 2003, 2006;
Pinotti, 2012). Based on the theoretical link and previous empirical support, we use the percentage of
the population identified in 1900 as Catholic, Protestant, Jewish, Muslim, Hindu, and Buddhist for our
instrumental variables.
[Insert Table 6 Here]
In Table 6, Panel A we report the OLS regressions with the trust index and the values index as
dependent variables and religion as the explanatory variables. The adjusted R-squared in each model
crosses the 0.20 benchmark and the F-statistics are above the critical 10.0 benchmark in all three
regressions. Thus, the first stage results empirically support the use of these instruments.
The second stage results are presented in Panel B of Table 6. In columns (1) and (2), we report
the benchmark specification controlling only for legal origin, income per capita, and each measure of
culture, respectively. In both specifications, culture remains negative and significant with an increase
in the size of the coefficients relative to those reported in columns (1) and (2) in Table 3. For example,
a one standard deviation increase in the values index (column 2) reduces the anti-self-dealing index by
almost one-half a standard deviation. Moving from the lowest to the highest scoring country on the
values index (Hong Kong to Norway) reduces the anti-self-dealing index by over two-fifths (0.43).
This represents a change from Singapore to Taiwan or the difference between Ghana and Luxembourg
(the wealthiest country in our sample). As robustness, in the next four regressions, we include both sets
of additional control variables separately. We find similar results as both culture indices remain
21
negative and significant. The results persist in columns (7) and (8) when including all controls
simultaneously.10
We also present the Hansen J statistic from overidentifying restrictions tests. Our results
indicate that in none of the regressions can we reject the null hypothesis that the instruments are valid,
conditional on at least some subset of instruments being valid. The fact that our instruments are
motivated by a solid theoretical argument strengthens the case that the exclusion restriction is met.
The results of the IV estimation support our earlier findings regarding the significance of
culture for the regulation of self-dealing. If anything, they suggest that endogeneity and attenuation
biases may cause OLS estimates to understate the role of culture in shaping the regulation of selfdealing. In sum, cultural values appear to play an important role in determining self-dealing regulation,
with more trusting, value oriented societies choosing to formally regulate less intensively than
countries that are less trusting and less focused on values.
5. Sensitivity Analysis
5.1. Alternative Culture Variables
In order to provide additional justification for our culture measures, we estimate our benchmark
specification replacing our culture indices with alternatives in the literature. First, we include a measure
of individual versus government responsibility from the WVS and described in Appendix A. This
measure is identified as a proxy for preferences for government regulation (Davis, 2014). Column (1)
of Table 7 reports a negative but insignificant association. Although insignificant, the negative sign
supports our substitution argument, suggesting that more individual responsibility leads to fewer
formal rules minimizing self-dealing. In columns (2) and (3), we include each measure of culture with
10 In these specifications, we drop overall economic freedom since freedom to trade is a subcomponent of the overall economic
freedom index. We also ran the regressions dropping freedom to trade and controlling for the overall economic freedom index. The
results are qualitatively unchanged and although untabulated, are available upon request.
22
individual responsibility and find that both culture measures retain their negative and significant
association.
[Insert Table 7 Here]
Next, we examine the Hofstede (2001) culture measures commonly used in the finance and
culture literature: uncertainty avoidance, power distance, individualism, and masculinity. Previous
literature documents a negative association between Hofstede’s uncertainty avoidance and indices of
shareholder voting rights and creditor rights (Licht et al., 2005). However, we do not find a similar
result for self-dealing regulation, as uncertainty avoidance is insignificant in each specification.
Hofstede’s individualism is also shown in the literature to have a robust association with a variety of
economic outcomes (Gorodnichenko and Roland, 2011). However, it is insignificant in our
specification. In fact, all four measures of culture from Hofstede are insignificant. In Columns (9) and
(10), we include the trust and values index with all four Hofstede measures. Importantly, both culture
indices remain negative and significant. These results provide justification for the use of our specific
measures of culture.
As another robustness check, we replace the anti-self-dealing index with a measure of minority
investor protection from the World Bank’s Doing Business. This index is based on the extent of conflict
of interest regulation and shareholder governance. We find that our results hold. Therefore, we do not
report these findings to save space.
5.2. Culture and Financial Market Development
To provide support for our substitution argument, we directly examine our culture indices and
financial market outcomes. The outcomes represent measures of a healthy financial system. Panel A
of Table 8 includes five measures commonly used in the literature (i.e., Guiso et al., 2004; Djankov et
al., 2008; La Porta et al., 2008): average stock market capitalization (% of GDP), control premium, log
number of firms per capita, IPOs to GDP, and ownership concentration.
[Insert Table 8 Here]
23
Predictions for each of these variables follow traditional agency theory (Jensen and Meckling,
1976). Public firms should be larger and more valuable in countries with strong shareholder protection.
IPO proceeds and the number of firms should likewise be larger (Shleifer and Wolfenzon, 2002). In
theory, private benefits of control are higher in countries with weaker investor protection (Grossman
and Hart, 1988; Nenova, 2003; Dyck and Zingales, 2004). Prior evidence also suggests that ownership
concentration is lower in countries with greater investor protections (La Porta et al., 1998, 1999).
Using the anti-self-dealing index as a measure of minority shareholder protection, Djankov et
al. (2008) find support for each of these predictions. We hypothesize in section 2 and empirically
document in section 4 a negative association between national culture and the anti-self-dealing index,
suggesting anonymous trust and personal values provide an alternative mechanism leading to
shareholder protection. If these informal rules are in fact substituting for formal regulation protecting
investors, we anticipate a positive impact on market capitalization, the number of publically traded
firms, and IPOs to GDP. Furthermore, both culture indices should negatively relate to the median
premium paid for corporate control. The interpretation is that benefits to private control should be
mitigated in countries with greater trust and personal values. Similarly, a negative association between
both culture indices and ownership concentration is expected.
To test these predictions, we adopt the simple empirical design of Djankov et al. (2008) and
La Porta et al. (2008), replacing the anti-self-dealing index with our culture indices. Following these
studies, we also control for judicial efficiency proxied by time to collect on a bounced check (Djankov
et al., 2003). Results presented in Panel A, Table 8 reveal that the trust index positively relates to larger
stock markets, the number of publically traded firms, and the amount of IPO equity issued. For
example, the economic impact of trusting strangers on market capitalization implies that moving from
the lowest to the highest trusting country increases market capitalization by 100 percentage points.
This is over a 1.5 standard deviation change and represents the difference between Jordan and Finland.
24
The values index is also positively and significantly related to the number of firms.11 This suggests that
moving from the lowest to the highest country on the values index (Hong Kong to Norway) increases
the number of firms per capita by 2%, equivalent to 1.34 standard deviations. Both indices have a
significant negative impact on ownership concentration and the benefits to private control.
Collectively, these results support the argument that cultures rich in anonymous trust and personal
values correlate with financial development.
In Panel B of Table 8 we include three additional measures of a healthy financial system:
turnover ratio (value of stocks traded/market capitalization), domestic credit to private sector, and log
GDP per capita. The results presented in columns (1) through (6) show that both indices significantly
and positively relate to each of these outcomes. For example, a one standard deviation increase in either
the trust or values index, leads to about a 13 percentage point increase in the turnover ratio. In addition,
both indices have a large positive and significant association with private sector credit. For example,
moving from the lowest to the highest country for personal values increases private sector credit by
approximately 85 percentage points, which is equivalent to about a 1.5 standard deviation increase.
Lastly, both culture indices have a positive and highly significant correlation with the level of economic
development. For example, a one standard deviation increase in either the trust or values index leads
to an increase in log GDP per capita of 0.49 and 0.60 percent, respectively. This represents a change
of 0.54 and 0.67 standard deviations.
These findings support the hypothesis that culture can provide an alternative mechanism for
formal rules supporting economic and financial development. The trust index is significantly related
to all financial measures and the values index significantly relates to six of eight financial outcomes.
Anonymous trust significantly decreases control premium and ownership concentration and
significantly increases the number of firms, IPOs proceeds, turnover, private sector credit, and the level
11 We note that while the values index is insignificantly related to market capitalization and IPOs at conventional levels, both
associations are positive and significant at the 18 percent level.
25
of economic development. The values index significantly reduces ownership concentration and control
premium. Values also increase number of firms, turnover, private sector credit, and income per capita.
While it could be argued that our measures of trust and values simply proxy for an exogenous
factor such as regulation, we hasten to remind the reader that as shown in previous tables, trust and
values substitute for formal regulation as the sign is negative. Combining these results with our main
findings, we contend that culture provides an alternative means of reducing self-dealing by substituting
formal regulation with informal rules. As such, these informal rules are directly promoting financial
and economic development.
This substitution argument finds support in the economics literature. For example, Coase’s
(1960) basic argument is that the market is an alternative to formal regulation since market-based
solutions can provide self-regulation. Supporting this view, Knack and Keefer (1997) find that
Scandinavian countries have weak legal investor protection but achieve substantial growth. This
suggests that something other than formal rules is filling in the gap to provide protection from
expropriation and supporting growth. Leeson (2007b) argues that in some cases relying on informal
institutions alone can provide better economic outcomes than those achieved with government. This
suggests that culture is capable of substituting for and providing functions traditionally attributed to
formal institutions.
6. Conclusion
An important literature examining corporate agency issues has emerged in the economics and
financial literature. Overwhelming theoretical and empirical evidence suggests that corporate selfdealing resulting from improperly aligned incentives hinders financial market development. The
economic impact of self-dealing and the regulation against such activities, however, varies
considerably across countries and remains largely unexplored.
26
Griffin et al. (2014) emphasize that the standardization of policies across countries ignores informal
institutions. The implication is that a good governance system must consider formal policies jointly with
national culture (Khanna et al., 2006). Our research examines the influence national culture has on
shareholder protection by identifying two avenues through which culture can impact financial markets.
We first hypothesize that culture indirectly impacts shareholder protection, as formal regulations
limiting self-dealing evolve from informal cultural norms. Alternatively, we hypothesize that culture
may directly deter self-dealing by impacting the perception of and the willingness to engage in the
expropriation of shareholders. Under this scenario, culture substitutes for legal rules and shareholder
protection emerges naturally.
Our evidence suggests that cultures grounded on anonymous trust and personal values
negatively relate to formal rules limiting self-dealing. Specifically, both our trust in strangers index
and personal values index are negatively related to the anti-self-dealing index. We interpret this
negative association as evidence that culture provides a substitute for formal regulation. Supporting
the substitution argument, we further find that these measures of culture positively relate to a healthy
financial system. Specifically, anonymous trust is positively associated with market capitalization,
number of firms per capita, IPOs to GDP, share turnover, private sector credit, and GDP per capita.
Personal values positively relate to the number of firms, share turnover, private sector credit, and GDP
per capita. Thus, while these culture-based measures negatively impact formal shareholder protection
on the books, they are positively related to financial market development. Collectively, we interpret
this as evidence that cultures rich in anonymous trust and personal values serve as a substitute for
formal shareholder protection.
These results have several implications. First, they support other evidence in the literature
suggesting that culture within a country plays a significant role in determining regulation. Second, they
indicate that shareholder protection can emerge naturally in countries fostering a culture of trust and
personal values and that culture can substitute for formal investor protection. At the very least, these
27
findings highlight that there are indeed a variety of ways of achieving investor protection and that
formal rules regarding shareholder rights should be considered jointly with a nation’s culture. Policies
recommending adoption of standard regulation across countries may not achieve the intended outcome
if these policies are not in line with informal rules within a country. In addition, this adoption may not
be necessary in countries with cultures that naturally support investor protection.
28
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32
Appendix A: Data Description
Variable
Anti-self-dealing index
Ex Ante index
Ex Post index
Log GDP pc
French
German
Scan
Trust generalized
Trust family
Trust personally
Trust neighbor
Trust first time
Trust other religion
Trust other nationality
Trust index
Cheat bus fare
Cheat gov benefits
Cheat taxes
Cheat bribe
Responsibility
Authority
Respect
Tolerance
Values index
Democracy
Control corruption
Reg. quality
Latitude
Description
First principal component of: (1) approval by disinterested shareholders; (2)
disclosures by buyer; (3) disclosures by Mr. James; (4) independent review; (5)
each of the elements in the index of disclosure in periodic filings; (6) standing to
sue; (7) rescission; ease of holding Mr. James liable; (8) ease of holding the
approving body liable; and (9) access to evidence.
First principal component of: (1) approval by disinterested shareholders; (2)
disclosures by buyer; (3) disclosures by Mr. James; and (4) independent review.
First principal component of: (1) each of the elements in the index of disclosure in
periodic filings; (2) standing to sue; (3) rescission; ease of holding Mr. James
liable; (4) ease of holding the approving body liable; and (5) access to evidence.
Log Gross Domestic Product per capita. Measured in 2012 or closest year
available.
Dummy variable 0 or 1:1 indicates a country has French legal traditions.
Dummy variable 0 or 1:1 indicates a country has German legal traditions.
Dummy variable 0 or 1:1 indicates a country has Scandinavian legal traditions.
Percentage of respondents answering that most people can be trusted. Uses the
most recent data available from the past three surveys.
Percentage of the respondents saying they trust people in their family. Uses the
most recent data available from the past three surveys.
Percentage of the respondents saying they trust people they know personally. Uses
the most recent data available from the past three surveys.
Percentage of the respondents saying they trust people from their neighborhood.
Uses the most recent data available from the past three surveys.
Percentage of the respondents saying they trust people they meet for the first time.
Uses the most recent data available from the past three surveys.
Percentage of the respondents saying they trust people of another religion. Uses
the most recent data available from the past three surveys.
Percentage of the respondents saying they trust people of another nationality. Uses
the most recent data available from the past three surveys.
First principal component of: 1) trust first time 2) trust other religion 3) trust other
nationality. Scaled between 0 and 1.
Mean score to the question is avoiding bus fare justifiable. Uses the most recent
data available from the past three surveys.
Mean score to the question is claiming unentitled government benefits justifiable.
Uses the most recent data available from the past three surveys.
Mean score to the question is cheating on taxes justifiable. Uses the most recent
data available from the past three surveys.
Mean score to the question is someone accepting a bribe justifiable. Uses the most
recent data available from the past three surveys.
Percentage of respondents answering that it is important to teach a children feeling
of responsibility. Uses the most recent data available from the past three surveys.
Percentage of respondents answering greater respect for authority is a good thing.
Uses the most recent data available from the past three surveys.
Percentage of respondents answering that it is important to teach children tolerance
and respect. Uses the most recent data available from the past three surveys.
Mean score to the question is homesexuality justifiable. Uses the most recent data
available from the past three surveys.
First principal component of: 1) responsibility 2) authority 3) respect 4) tolerance.
Scaled between 0 and 1.
Captures the level of democracy ranging from 0 to 10 with 10 representing strong
democracy. Measured in 2013.
Control of corruption captures perceptions of the extent to which public power is
exercised for private gain, including both petty and grand forms of corruption, as
well as "capture" of the state by elites and private interests. Measured in 2012.
Regulatory quality captures perceptions of the ability of the government to
formulate and implement sound policies and regulations that permit and promote
private sector development. Measured in 2012.
Measured as the absolute value of the latitude of the country.
33
Source
Djankov et al. 2008
Djankov et al. 2008
Djankov et al. 2008
WDI 2014
La Porta et al. 2008
La Porta et al. 2008
La Porta et al. 2008
WVS 1999-2014
WVS 1999-2014
WVS 1999-2014
WVS 1999-2014
WVS 1999-2014
WVS 1999-2014
WVS 1999-2014
WVS 1999-2014
WVS 1999-2014
WVS 1999-2014
WVS 1999-2014
WVS 1999-2014
WVS 1999-2014
WVS 1999-2014
WVS 1999-2014
WVS 1999-2014
WVS 1999-2014
Polity IV 2013
WGI 2014
WGI 2014
CIA World Fact Book
Econ. free
Measures the degree to which the policies and institutions are supportive of
economic freedom in five broad areas: 1) Size of Government, 2) Legal Structure
and Security of Property Rights, 3) Access to Sound Money, 4) Freedom to Trade
Internationally, 5) Regulation of Credit, Labor, and Business. Measured in 2012.
Free to trade
Component of the Economic Freedom of the World Index measuring freedom to
trade internationally including low tariffs, quotas, easy administrative customs,
freely convertible currency, and few controls on capital. Measured in 2012.
Unemployment
Refers to the share of the labor force that is without work but available for and
seeking employment. Measured in 2012 or closest year available.
Growth
Annual percentage growth rate of GDP per capita. Measured in 2012 or closest
year available.
Avg. school
Avgerage years of schooling of the population over age 25 in 2000 or last year
available.
Newspaper
Logarithmic number of newspapers and periodicals circulation per thousand
inhabitants in 2000 (or closest available).
Ethnic frac
Measured by Ethnolinguistic Fractionalization which is the average value of five
different indices of ethonolinguistic fractionalization. Its value ranges from 0 to 1.
The five component indices are: (1) probability that two randomly selected people
from a given country will not belong to the same ethnolinguistic group (2)
probability of two randomly selected individuals speaking different languages; (3)
probability of two randomly selected individuals do not speak the same language;
(4) percent of the population not speaking the official language; and (5) percent of
the population not speaking the most widely used language.
Religion
Percentage of the population that is Catholic, Protestant, Jewish, Muslim, Hindu,
and Buddhist. Measured in 1900.
Individual resp.
The average responses ranging from 1 to 10 from the question: People should take
more responsibility to provide for themselves (score 10) or the government should
take more responsibility to ensure that everyone is provided for (score 1).
Power distance
Measures the degree to which less powerful members of society accept and expect
power to be distributed unequally capturing how society handles inequalities
among people. In low power distance cultures, people strive to equalize the
distribution of power and demand justification for inequalities of power.
Masculinity
Reflects the emphasis in society on caring for others, solidarity, and quality of life
(Femininity), as opposed to achievement and success (Masculinity).
Individualism
The degree to which individuals are integrated into groups; assumes weak ties
among group members. Denotes the extent to which society sees people primarily
as individuals looking after themselves (high individualism) or primarily as
members of tightly knit communities (low individualism).
Uncertainty avoidance
The degree to which members of society are comfortable in unstructured situations.
Highly uncertainty avoidant cultures are characterized by a strong need for
predictability and control over the environment.
Investor protection index Measures the protection of minority investors from conflicts of interest and
shareholders’ rights in corporate governance as of 2012.
Time to collect
Log of calendar days of the judicial procedure to collect on a bounced check.
Market capitalization
Average of the stock market capitalization to GDP.
Control premium
Difference between the price per share paid for the control block and the exchange
price two days after the announcement of the control transaction, dividing by the
exchange price and multiplying by the ratio of the proportion of cash flow rights
in the controlling block.
Ln firms/pop
Log number of domestic companies listed on the country's stock exchange divided
by population. Averaged from 1999-2003.
IPOs
Average ratio of the equity issued by newly listed firms (in thousands) to GDP (in
millions) over the period 1996-2000.
Ownership concentration Average percentage of common shares owned by the top three shareholders in the
ten largest non-financial, privately-owned domestic firms in a given country.
Turnover
Total value of shares traded divided by average market capitalization. Measured
from 2009-2012.
Private sector credit
Domestic credit provided to the private sector by financial corporations as a
percentage of GDP.
34
Gwartney et al. 2014
Gwartney et al. 2014
WDI 2014
WDI 2014
Barro and Lee 2001
Djankov et al. 2008
Alesina et al. 2003
McCleary and Barro
2006
WVS 1999-2014
Hofstede 2001
Hofstede 2001
Hofstede 2001
Hofstede 2001
Doing Business 2013
Djankov et al. 2003
Djankov et al. 2008
Djankov et al. 2008
La Porta et al. 2008
Djankov et al. 2008
Djankov et al. 2008
WDI 2014
WDI 2014
Figure 1. Culture and Finance Market Outcomes
This figure provides a simple theoretical depiction of the link beween informal cultural norms, formal investor
protection, and financial outcomes. Arrow A identifies the connection between formal investor protection and
financial outcomes. Arrows B and C define two possible avenues for culture’s influence on financial markets.
Arrow B identifies the indirect association where culture influences formal shareholder protection, thereby
impacting financial outcomes via government regulation. Arrow C identifies culture’s direct effect on financial
outcomes via alternative channels other than culture’s impact on formal rules.
Financial Market Outcomes
Culture:
Informal Investor Protection
Regulation:
Formal Investor Protection
35
Table 1. Summary Statistics
Table 1 presents descriptive statistics for our variables of interest. Anti-self-dealing index measures the strength
of minority shareholder protection against self-dealing by the controlling shareholder. A higher score on the antiself-dealing index indicates more formal country-level legal protection against self-dealing. Ex ante index is a subindex capturing the required disclosure, approval by disinterested shareholders, and necessity of an independent
review. Ex post index is a sub-index of the anti-self-dealing index measuring ex post rules based on ease of proving
wrongdoing, including acquiring access to evidence, and ex post disclosures. Log GDP pc is the log GDP per
capita measured in 2012 or closest year available. French, German, Scan are indicator variables to control for
legal origin. Trust generalized is the percentage of WVS respondents stating that most people can be trusted. Trust
family, Trust personally, Trust neighbor, Trust first time, Trust other religion, and Trust other nationality is the
percentage of WVS respondents saying they trust the respective party. Trust index is the first principal component
of trust first time, trust other religion, and trust other nationality, scaled between 0 and 1. Cheat bus fare and Cheat
taxes is the mean WVS score to the question is avoiding a bus fare and is cheating on taxes justifiable, respectively.
Cheat gov benefits is the mean WVS score to the question is claiming unentitled government benefits justifiable
and Cheat bribe the mean response to the question is accepting a bribe justifiable. Responsibility is the percentage
of WVS respondents answering that it is important to teach children a feeling of responsibility and Authority the
percentage answering greater respect for authority is a good thing. Respect is the percentage answering that it is
important to teach children tolerance and respect. Tolerance is the mean score to the question is homosexuality
justifiable. Values index is the first principal component of responsibility, authority, respect, and tolerance, scaled
between 0 and 1.
Variable
Anti-self-dealing index
Ex ante index
Ex post index
GDP per capita
Log GDP pc
French
German
Scan
Trust generalized
Trust family
Trust personally
Trust neighbor
Trust index
Trust first time
Trust other religion
Trust other nationality
Cheat bus fare
Cheat gov benefits
Cheat taxes
Cheat bribe
Values index
Responsibility
Authority
Respect
Tolerance
Observations
71
71
71
68
68
70
70
70
56
48
48
48
48
48
48
48
55
57
55
58
56
58
57
58
57
Mean
0.44
0.35
0.52
18,242
9.82
0.43
0.19
0.07
26.08
96.85
78.40
72.26
0.50
25.82
43.88
39.62
2.65
2.69
2.26
1.86
0.50
71.45
57.10
68.71
3.87
36
Std. Dev.
0.24
0.33
0.24
18,737
0.91
0.50
0.39
0.26
16.92
2.40
14.19
12.52
0.30
13.80
18.22
20.53
0.78
1.05
0.63
0.49
0.30
13.41
22.42
13.95
1.97
Min
0.08
0.00
0.03
401
7.21
0.00
0.00
0.00
3.20
87.60
41.90
33.90
0.00
5.40
9.10
8.80
1.39
1.34
1.27
1.26
0.00
26.40
4.70
14.20
1.14
Max
1.00
1.00
1.00
79,078
11.40
1.00
1.00
1.00
73.70
100.00
98.00
89.60
1.00
65.70
77.90
83.40
4.88
8.53
3.72
4.00
1.00
90.80
94.50
91.70
8.18
Table 2. Culture Variables and the Regulation of Self-dealing
This table presents OLS regressions with the overall anti-self-dealing index as the dependent variable and culture variables as
the primary independent variables of interest. A higher score on the anti-self-dealing index indicates more formal country-level
legal protection against self-dealing. Panel A reports tests on answers to questions concerning trust reported in the last three
waves of the WVS (1999-2014). Trust generalized is the percentage of WVS respondents stating that most people can be trusted.
Trust family, Trust personally, Trust neighbor, Trust first time, Trust other religion, and Trust other nationality is the percentage
of WVS respondents saying they trust the respective party. Panel B reports results from tests on answers to questions reflecting
values in the last three waves of the WVS. Cheat bus fare and Cheat taxes is the mean score to the question is avoiding a bus
fare and is cheating on taxes justifiable, respectively. Cheat gov benefits is the mean score to the question is claiming unentitled
government benefits justifiable and Cheat bribe the mean response to the question is accepting a bribe justifiable. Responsibility
is the percentage of respondents answering that it is important to teach children a feeling of responsibility and Authority the
percentage answering greater respect for authority is a good thing. Respect is the percentage answering that it is important to
teach children tolerance and respect. Tolerance is the mean score to the question is homosexuality justifiable. French, German,
Scan are indicator variables to control for legal origin. English is the omitted indicator. Log GDP pc is the log of GDP per capita
measured in 2012 or closest year available. Standard deviations are reported in parenthesis. ***, ** and *denote significance at
1%, 5%, and 10%, respectively.
Panel A: Trust on Anti-self-dealing index
(1)
(2)
Trust generalized
0.002
(0.004)
Trust family
0.001
(0.011)
Trust personally
(3)
(4)
(5)
(6)
-0.051
(0.107)
Trust neighbor
-0.001
(0.002)
Trust first time
-0.007***
(0.002)
Trust other religion
-0.004**
(0.002)
Trust other nationality
French
German
Scan
Log GDP pc
Constant
Observations
Adj. R2
-0.304***
(0.077)
-0.359***
(0.075)
-0.423***
(0.112)
0.067
(0.044)
-0.044
(0.340)
52
40%
-0.368***
(0.058)
-0.362**
(0.103)
-0.395***
(0.067)
0.080**
(0.034)
-0.179
(1.009)
45
46%
-0.374***
(0.059)
-0.367***
(0.101)
-0.381***
(0.070)
0.087**
(0.038)
-0.109
(0.344)
45
46%
37
(7)
-0.376***
(0.059)
-0.366**
(0.105)
-0.388***
(0.066)
0.083**
(0.036)
-0.013
(0.307)
45
46%
-0.413***
(0.053)
-0.406***
(0.083)
-0.225**
(0.085)
0.128***
(0.031)
-0.328
(0.293)
45
55%
-0.423***
(0.060)
-0.422***
(0.073)
-0.325***
(0.073)
0.120***
(0.031)
-0.234
(0.287)
45
52%
-0.004**
(0.002)
-0.396***
(0.056)
-0.393***
(0.079)
-0.307***
(0.072)
0.129***
(0.031)
-0.378
(0.286)
45
52%
Panel B: Values on Anti-self-dealing index
(1)
(2)
Cheat bus fare
-0.024
(0.029)
Cheat gov benefits
0.018
(0.021)
Cheat taxes
(3)
(4)
(5)
(6)
(7)
-0.026
(0.033)
Cheat bribe
0.006
(0.043)
Responsibility
-0.006*
(0.003)
Authority
-0.003**
(0.001)
Respect
-0.004**
(0.002)
Tolerance
French
German
Scan
Log GDP pc
Constant
Observations
Adj. R2
-0.331*** -0.332***
(0.069)
(0.066)
-0.354*** -0.374***
(0.092)
(0.085)
-0.372*** -0.363***
(0.075)
(0.075)
0.087**
0.087**
(0.028)
(0.026)
-0.109
-0.213
(0.287)
(0.247)
51
53
40%
40%
-0.333***
(0.066)
-0.342***
(0.092)
-0.370***
(0.077)
0.085**
(0.027)
-0.088
(0.299)
51
39%
-0.327***
(0.063)
-0.362***
(0.081)
-0.367***
(0.072)
0.087**
(0.029)
-0.181
(0.326)
54
41%
38
(8)
-0.230**
(0.086)
-0.268**
(0.106)
-0.237**
(0.115)
0.120***
(0.027)
-0.124
(0.224)
54
47%
-0.302***
(0.063)
-0.412***
(0.074)
-0.454***
(0.071)
0.077**
(0.027)
0.134
(0.300)
53
49%
-0.318***
(0.063)
-0.372***
(0.072)
-0.302***
(0.084)
0.104***
(0.021)
-0.070
(0.235)
54
46%
-0.033**
(0.016)
-0.314***
(0.062)
-0.346***
(0.078)
-0.284***
(0.070)
0.128***
(0.024)
-0.452**
(0.192)
53
44%
Table 3. Culture Indices and the Regulation of Self-dealing
Table 3 reports OLS regressions of the trust index and values index on the overall anti-self-dealing index and its two subindices. Anti-self-dealing index is the full index measuring the strength of minority shareholder protection against self-dealing
by the controlling shareholder. Ex ante index is the sub-index capturing the required disclosure, approval by disinterested
shareholders, and necessity of an independent review. Ex post index is the sub-index of the anti-self-dealing index measuring
ex post rules based on ease of proving wrongdoing, including acquiring access to evidence, and ex post disclosures. Trust index
is the first principal component of trust first time, trust other religion, and trust other nationality, scaled between 0 and 1. Values
index is the first principal component of responsibility, authority, respect, and tolerance, scaled between 0 and 1. Each of these
sub-components are described in detail in Appendix A. French, German, Scan are indicator variables to control for legal origin.
English is the omitted indicator. Log GDP pc is the log of GDP per capita measured in 2012 or closest year available. Standard
deviations are reported in parenthesis. ***, ** and *denote significance at 1%, 5%, and 10%, respectively.
Dep. Var:
Trust index
Anti-self-dealing index
(1)
(2)
-0.301**
(0.100)
Values index
French
German
Scan
Log GDP pc
Constant
Observations
Adj. R2
-0.407***
(0.055)
-0.405***
(0.075)
-0.321***
(0.073)
0.131***
(0.030)
-0.396
(0.280)
45
55%
Ex ante index
(3)
-0.463**
(0.189)
-0.348**
(0.126)
-0.263***
(0.067)
-0.323***
(0.074)
-0.235**
(0.096)
0.154***
(0.021)
-0.680**
(0.197)
52
50%
-0.406***
(0.100)
-0.471**
(0.139)
-0.365**
(0.146)
0.142**
(0.054)
-0.476
(0.515)
45
26%
39
Ex post index
(4)
(5)
(6)
-0.139
(0.105)
-0.578**
(0.205)
-0.170
(0.110)
-0.360**
(0.124)
-0.226
(0.153)
0.183***
(0.042)
-0.941**
(0.379)
52
28%
-0.408***
(0.055)
-0.338***
(0.062)
-0.278**
(0.119)
0.120***
(0.029)
-0.317
(0.244)
45
54%
-0.119
(0.128)
-0.356***
(0.077)
-0.286***
(0.069)
-0.245*
(0.143)
0.125***
(0.026)
-0.418*
(0.243)
52
47%
Table 4. Culture and Regulation of Self-dealing with Institutional Controls
OLS regressions of the trust index and values index on the overall anti-self-dealing index with institutional controls. Anti-self-dealing index is the full index measuring the strength of minority
shareholder protection against self-dealing by the controlling shareholder. Trust index is the first principal component of trust first time, trust other religion, and trust other nationality, scaled between
0 and 1. Values index is the first principal component of responsibility, authority, respect, and tolerance, scaled between 0 and 1. Each sub-component is described in detail in Appendix A. Democracy
is the level of democracy from Polity IV 2013, ranging from 0 to 10 with 10 representing strong democracy. Control corruption is the WGI 2014 measure of perceptions of the extent to which public
power is exercised for private gain. Reg. quality is the perceptions of the ability of the government to formulate and implement sound policies and regulations that permit and promote private sector
development as measured by WGI 2014. Econ. free is the degree to which the policies and institutions are supportive of economic freedom (Gwartney et al., 2014). Latitude is the absolute value of the
latitude of the country. French, German, Scan are indicator variables to control for legal origin. English is the omitted indicator. Log GDP pc is the log of GDP per capita measured in 2012 or closest
year available. Standard deviations are reported in parenthesis. ***, ** and *denote significance at 1%, 5%, and 10%, respectively.
Dep. Var: Anti-self-dealing index
(1)
Trust index
(3)
(4)
(5)
(6)
(7)
(8)
(10)
(11)
-0.317**
-0.293**
-0.309**
-0.337**
-0.255**
-0.256**
(0.103)
(0.103)
(0.114)
(0.112)
(0.118)
(12)
-0.421**
-0.423**
-0.395***
-0.354**
-0.334**
-0.423**
(0.190)
(0.139)
(0.107)
(0.118)
(0.134)
(0.145)
-0.014
0.004
(0.009)
(0.015)
Control corruption
-0.024**
-0.008
(0.009)
(0.016)
-0.015
0.086*
-0.074
-0.002
(0.045)
(0.051)
(0.058)
(0.058)
Reg. quality
0.060
0.143**
(0.068)
0.272**
(0.043)
Econ. free
0.025
0.074
(0.047)
(0.044)
Latitude
0.276**
(0.087)
(0.106)
-0.024
-0.115
(0.141)
(0.173)
-0.182
-0.187
-0.068
-0.086
(0.065)
(0.178)
(0.189)
(0.054)
-0.409***
-0.239**
-0.413***
-0.218**
-0.388***
-0.220***
-0.442***
-0.248***
-0.394***
-0.254***
-0.437***
-0.232***
(0.056)
(0.074)
(0.063)
(0.075)
(0.060)
(0.055)
(0.065)
(0.062)
(0.057)
(0.068)
(0.065)
(0.062)
German
-0.407***
-0.323***
-0.406***
-0.398***
-0.317***
-0.416***
-0.297***
-0.374***
-0.288***
-0.425***
-0.327***
(0.059)
(0.076)
(0.075)
(0.078)
(0.078)
(0.072)
(0.075)
(0.072)
(0.081)
(0.079)
(0.070)
(0.082)
Scan
-0.303***
-0.214**
-0.314***
-0.276**
-0.328***
-0.263**
-0.308***
-0.205**
-0.279**
-0.181*
-0.348***
-0.277**
(0.069)
(0.102)
(0.079)
(0.081)
(0.074)
(0.080)
(0.071)
(0.082)
(0.088)
(0.100)
(0.094)
(0.096)
0.148***
0.162***
0.078
0.050
0.098*
0.037
0.028
(0.029)
(0.027)
(0.044)
(0.036)
(0.060)
(0.042)
(0.054)
(0.042)
(0.025)
(0.016)
(0.067)
(0.054)
-0.449
-0.753**
-0.530
-0.068
0.086
0.265
-0.215
-0.581**
-0.458*
-0.777***
(0.269)
(0.264)
(0.411)
(0.328)
(0.536)
(0.370)
(0.326)
(0.275)
(0.245)
Observations
44
50
45
52
45
52
38
45
2
58%
46%
54%
54%
55%
60%
60%
59%
French
Log GDP pc
Constant
Adj. R
0.145**
-0.286***
0.089**
40
(9)
(0.089)
Values index
Democracy
(2)
0.090**
0.141***
0.168***
1.071
1.127
(0.155)
(0.690)
(0.686)
45
52
38
44
55%
51%
68%
60%
Table 5. Culture and Regulation of Self-dealing with Economic Controls
Table 5 reports OLS regressions of the trust index and values index on the overall anti-self-dealing index with economic controls. Anti-self-dealing index is the full index measuring the strength of minority shareholder
protection against self-dealing by the controlling shareholder. Trust index is the first principal component of trust first time, trust other religion, and trust other nationality, scaled between 0 and 1. Values index is the first
principal component of responsibility, authority, respect, and tolerance, scaled between 0 and 1. Each sub-component is described in detail in Appendix A. Free to trade is the component of the Economic Freedom of the
World Index measuring freedom to trade internationally (Gwartney et al, 2014). Unemployment is the share of the labor force that is without work but available for and seeking employment. Growth is the annual percentage
growth rate of GDP per capita. Avg. school is the average years of schooling of the population over age 25 in 2000 or last year available. Newspaper is the logarithmic number of newspapers and periodicals circulation per
thousand inhabitants in 2000 or closest year available. Ethnic frac is the average value of five different indices of ethnolinguistic fractionalization described in Appendix A and ranges from 0 to 1. French, German, Scan
are indicator variables to control for legal origin. English is the omitted indicator. Log GDP pc is the log of GDP per capita measured in 2012 or closest year available. Standard deviations are reported in parenthesis. ***,
** and *denote significance at 1%, 5%, and 10%, respectively.
Dep. Var: Anti-self-dealing index
Trust index
(1)
-0.332**
(0.115)
Values index
Free to trade
-0.003
(0.043)
(2)
(3)
-0.315**
(0.112)
-0.376**
(0.126)
0.043
(0.037)
Unemployment
(4)
(5)
-0.228**
(0.083)
-0.340**
(0.129)
0.003
(0.006)
(6)
(7)
-0.274**
(0.100)
-0.322**
(0.130)
(8)
(9)
-0.319**
(0.094)
-0.346**
(0.142)
(10)
-0.295**
(0.123)
0.044**
(0.014)
-0.012
(0.012)
-0.004
(0.019)
Newspaper
-0.078*
(0.043)
-0.092**
(0.044)
Ethnic frac
German
Scan
Log GDP pc
Constant
Observations
Adj. R2
-0.264***
(0.067)
-0.313***
(0.073)
-0.207**
(0.093)
0.109**
(0.038)
-0.553**
(0.245)
45
56%
-0.413***
(0.061)
-0.403***
(0.077)
-0.314***
(0.075)
0.132***
(0.031)
-0.413
(0.284)
45
54%
-0.260***
(0.069)
-0.319***
(0.076)
-0.242**
(0.098)
0.154***
(0.022)
-0.667**
(0.199)
52
49%
-0.384***
(0.051)
-0.438***
(0.046)
-0.313***
(0.086)
0.192***
(0.027)
-1.115***
(0.293)
45
64%
-0.253***
(0.069)
-0.299***
(0.070)
-0.226**
(0.106)
0.177***
(0.021)
-0.988***
(0.207)
52
53%
-0.408***
(0.055)
-0.391***
(0.077)
-0.310***
(0.072)
0.152***
(0.028)
-0.524**
(0.240)
45
54%
41
-0.264***
(0.073)
-0.308***
(0.078)
-0.230**
(0.094)
0.161***
(0.029)
-0.727***
(0.191)
51
49%
-0.457***
(0.052)
-0.394***
(0.083)
-0.285**
(0.093)
0.210***
(0.037)
-0.792**
(0.236)
42
61%
-0.299***
(0.066)
-0.303***
(0.084)
-0.206*
(0.114)
0.235***
(0.046)
-1.075***
(0.283)
49
53%
(13)
-0.382***
(0.098)
-0.347**
(0.127)
0.020*
(0.012)
Avg. school
-0.449***
(0.063)
-0.426***
(0.077)
-0.324***
(0.073)
0.127**
(0.056)
-0.292
(0.350)
38
60%
(12)
-0.002
(0.005)
Growth
French
(11)
-0.306**
(0.100)
0.054
(0.136)
-0.402***
(0.059)
-0.391***
(0.087)
-0.304**
(0.091)
0.137***
(0.028)
-0.476*
(0.278)
45
54%
-0.033
(0.125)
-0.266***
(0.069)
-0.330***
(0.074)
-0.244**
(0.101)
0.149***
(0.023)
-0.621**
(0.240)
52
49%
0.016
(0.037)
0.014**
(0.004)
0.035*
(0.018)
-0.005
(0.015)
-0.045
(0.047)
-0.211*
(0.117)
-0.517***
(0.074)
-0.505***
(0.079)
-0.328**
(0.103)
0.214**
(0.066)
-1.057**
(0.422)
36
74%
(14)
-0.320**
(0.123)
0.055
(0.039)
0.007
(0.004)
0.028**
(0.009)
-0.008
(0.017)
-0.102**
(0.049)
-0.365**
(0.125)
-0.328***
(0.068)
-0.318***
(0.074)
-0.221**
(0.104)
0.195**
(0.066)
-0.935**
(0.347)
42
68%
Table 6. Culture and Regulation of Self-dealing with IV Estimation
In this table we instrument for culture using historical religion measured as the percentage of the population identified in
1900 as Catholic, Protestant, Jewish, Muslim, Hindu, and Buddhist. Panel A reports the first stage OLS regressions with the
trust index and values index as the dependent variable. Panel B presents the second state results with the anti-self-dealing
index as the explanatory variable. Trust index is the first principal component of trust first time, trust other religion, and trust
other nationality, scaled between 0 and 1. Values index is the first principal component of responsibility, authority, respect,
and tolerance, scaled between 0 and 1. Each sub-component is described in detail in Appendix A. Democracy is the level of
democracy from Polity IV 2013, ranging from 0 to 10 with 10 representing strong democracy. Control corruption is the WGI
2014 measure of perceptions of the extent to which public power is exercised for private gain. Reg. quality is the perceptions
of the ability of the government to formulate and implement sound policies and regulations that permit and promote private
sector development as measured by WGI 2014. Econ. free is the degree to which the policies and institutions are supportive
of economic freedom (Gwartney et al, 2014). Latitude is the absolute value of the latitude of the country. Free to trade is the
component of the Economic Freedom of the World Index measuring freedom to trade internationally (Gwartney et al, 2014).
Unemployment is the share of the labor force that is without work but available for and seeking employment. Growth is the
annual percentage growth rate of GDP per capita. Avg. school is the average years of schooling of the population over age
25 in 2000 or last year available. Newspaper is the logarithmic number of newspapers and periodicals circulation per thousand
inhabitants in 2000 or closest year available. Ethnic frac is the average value of five different indices of ethnolinguistic
fractionalization described in Appendix A and ranges from 0 to 1. French, German, Scan are indicator variables to control
for legal origin. English is the omitted indicator. Log GDP pc is the log of GDP per capita measured in 2012 or closest year
available. Standard deviations are reported in parenthesis. ***, ** and *denote significance at 1%, 5%, and 10%, respectively.
In Panel B, Hansen’s J statistic is reported.
Panel A: First stage IV
Dep. Var:
Catholic 1900
Protestant 1900
Jewish 1900
Muslim 1900
Hindu 1900
Buddhist 1900
Trust index
(1)
0.042
(0.129)
0.608***
(0.107)
0.142
(1.638)
-0.076
(0.141)
0.067
(0.102)
-0.272**
(0.115)
Values index
(2)
0.453***
(0.091)
0.767***
(0.085)
2.205**
(0.940)
0.057
(0.107)
0.042
(0.088)
0.301
(0.219)
0.407***
(0.090)
48
40%
19.50
0.175**
(0.069)
56
56%
43.19
French
German
Scan
Log GDP pc
Constant
Observations
Adj. R2
F-stat
42
Trust index
(3)
-0.117
(0.156)
0.328
(0.211)
1.082
(1.848)
-0.151
(0.157)
0.088
(0.121)
-0.478**
(0.151)
-0.043
(0.134)
-0.093
(0.117)
-0.037
(0.105)
0.135**
(0.049)
-0.772*
(0.410)
45
49%
45.93
Values index
(4)
0.386***
(0.094)
0.651***
(0.135)
2.243**
(1.083)
-0.019
(0.105)
0.229**
(0.069)
0.226
(0.217)
0.141**
(0.067)
-0.017
(0.067)
0.078
(0.062)
0.085**
(0.037)
-0.668**
(0.298)
52
72%
215.31
Panel B:
Dep. Var: Anti-self-dealing index
(1)
(2)
Trust index
-0.344**
(0.143)
Values index
-0.434**
(0.149)
Democracy
Control corruption
Reg. quality
Econ. free
Latitude
(3)
-0.361**
(0.116)
-0.024***
(0.007)
-0.032
(0.048)
0.257***
(0.073)
-0.061
(0.047)
0.028
(0.117)
(4)
-0.590**
(0.210)
-0.002
(0.015)
-0.061
(0.052)
0.270**
(0.100)
-0.096
(0.066)
-0.129
(0.168)
Free to trade
Unemployment
Growth
Avg. school
Newspaper
Ethnic frac
French
German
Scan
Log GDP pc
Constant
Observations
Adj. R2
Hansen J-stat
p-value
-0.412***
(0.055)
-0.411***
(0.072)
-0.311***
(0.075)
0.138***
(0.033)
-0.443
(0.286)
45
55%
5.38
0.37
-0.248***
(0.066)
-0.317***
(0.070)
-0.202**
(0.098)
0.170***
(0.023)
-0.803***
(0.191)
52
50%
6.29
0.28
-0.448***
(0.059)
-0.444***
(0.060)
-0.343***
(0.085)
0.043
(0.055)
1.002*
(0.584)
38
66%
7.62
0.18
-0.204**
(0.065)
-0.320***
(0.072)
-0.244**
(0.097)
0.042
(0.044)
1.090*
(0.630)
44
59%
4.22
0.52
43
(5)
-0.578***
(0.135)
(6)
(7)
-0.536***
(0.096)
-0.396**
(0.134)
0.023
(0.030)
0.018***
(0.005)
0.032**
(0.013)
0.003
(0.014)
-0.036
(0.038)
-0.233**
(0.114)
-0.558***
(0.057)
-0.555***
(0.070)
-0.321***
(0.086)
0.218***
(0.055)
-1.139***
(0.336)
36
72%
5.34
0.37
0.055*
(0.032)
0.007**
(0.003)
0.028***
(0.008)
-0.007
(0.014)
-0.101**
(0.040)
-0.363***
(0.110)
-0.313***
(0.065)
-0.315***
(0.065)
-0.195*
(0.106)
0.204***
(0.061)
-1.014**
(0.332)
42
68%
6.35
0.27
(8)
-0.012**
(0.006)
-0.076
(0.049)
0.151*
(0.081)
-0.386*
(0.209)
-0.000
(0.011)
-0.061
(0.069)
0.217**
(0.099)
0.210**
(0.106)
-0.003
(0.034)
0.016***
(0.004)
0.036**
(0.011)
-0.007
(0.011)
-0.004
(0.033)
-0.166*
(0.100)
-0.532***
(0.063)
-0.570***
(0.065)
-0.359***
(0.083)
0.163**
(0.061)
-0.564
(0.531)
36
73%
6.82
0.23
0.029
(0.177)
-0.019
(0.039)
0.007**
(0.003)
0.041***
(0.012)
-0.009
(0.014)
-0.053
(0.034)
-0.262**
(0.094)
-0.302***
(0.073)
-0.407***
(0.087)
-0.244**
(0.104)
0.150**
(0.050)
-0.257
(0.455)
41
70%
8.37
0.14
Table 7. Culture and Regulation of Self-dealing with Alternative Culture Variables
Table 7 presents regressions of other culture variables found in the literature on the anti-self-dealing index. The trust index and values index are included to show the marginal
impact. Trust index is the first principal component of trust first time, trust other religion, and trust other nationality, scaled between 0 and 1. Values index is the first principal
component of responsibility, authority, respect, and tolerance, scaled between 0 and 1. Each sub-component is described in detail in Appendix A. Individual resp. is the average
WVS responses ranging from 1 to 10 from the question: People should take more responsibility to provide for themselves (10) or the government should take more responsibility
(1). Uncertainty avoidance is the Hofstede 2001 degree to which members of society are comfortable in unstructured situations. Power distance is the Hofstede 2001 degree to
which less powerful members of society accept and expect power to be distributed unequally. Individualism is the Hofstede 2001 degree to which individuals are integrated into
groups, and Masculinity is the Hofstede 2001 measure reflecting the emphasis in society on caring for others, solidarity, and quality of life (Femininity), as opposed to achievement
and success (Masculinity). French, German, Scan are indicator variables to control for legal origin. English is the omitted indicator. Log GDP pc is the log of GDP per capita
measured in 2012 or closest year available. Standard deviations are reported in parenthesis. ***, ** and *denote significance at 1%, 5%, and 10%, respectively.
Dep. Var: Anti-self-dealing index
(1)
Trust index
(2)
-0.303**
(0.103)
Values index
Individual resp.
-0.002
(0.002)
0.000
(0.003)
(3)
(4)
(5)
(6)
Power distance
0.001
(0.002)
Individualism
-0.001
(0.002)
Masculinity
German
Scan
Log GDP pc
Constant
Observations
Adj. R2
-0.406***
(0.058)
-0.403***
(0.082)
-0.320***
(0.076)
0.131***
(0.030)
-0.402
(0.273)
45
54%
-0.255***
(0.062)
-0.309***
(0.075)
-0.227**
(0.094)
0.160***
(0.024)
-0.763**
(0.231)
52
49%
-0.231**
(0.099)
-0.297**
(0.103)
-0.351***
(0.067)
0.083**
(0.036)
-0.021
(0.388)
56
39%
44
(9)
-0.240*
(0.139)
(10)
-0.336*
(0.178)
-0.003
(0.002)
-0.334***
(0.060)
-0.375***
(0.077)
-0.367***
(0.072)
0.085**
(0.026)
-0.108
(0.247)
54
42%
(8)
-0.372**
(0.132)
0.001
(0.002)
Uncertainty avoidance
French
(7)
-0.334***
(0.076)
-0.364***
(0.086)
-0.314***
(0.066)
0.099**
(0.041)
-0.369
(0.452)
56
37%
-0.326***
(0.072)
-0.359***
(0.085)
-0.329***
(0.065)
0.101**
(0.046)
-0.266
(0.405)
56
37%
-0.002
(0.002)
-0.330***
(0.062)
-0.320**
(0.100)
-0.417***
(0.097)
0.084**
(0.039)
-0.041
(0.400)
56
37%
-0.003
(0.002)
0.001
(0.002)
-0.000
(0.002)
-0.002
(0.003)
-0.262**
(0.112)
-0.257*
(0.131)
-0.439**
(0.137)
0.103**
(0.046)
-0.098
(0.563)
56
39%
-0.002
(0.002)
0.001
(0.002)
-0.001
(0.002)
-0.001
(0.003)
-0.343***
(0.091)
-0.326**
(0.109)
-0.322**
(0.141)
0.127**
(0.039)
-0.267
(0.520)
40
53%
-0.003
(0.002)
-0.002
(0.002)
-0.001
(0.002)
-0.001
(0.003)
-0.135
(0.114)
-0.190
(0.120)
-0.300*
(0.158)
0.119**
(0.034)
0.011
(0.496)
44
50%
Table 8: Culture and Financial Market Development
Table 8 tests the association of our culture indices on financial market outcomes. Panel A presents five measures of a healthy financial market following Djankov et al. 2008. Market
Capitalization is the average of the stock market capitalization to GDP. Control premium is the difference between the price per share paid for the control block and the exchange price two
days after the announcement of the control transaction, dividing by the exchange price and multiplying by the ratio of the proportion of cash flow rights in the controlling block. Ln firms/pop
is the log number of domestic companies listed on the country's stock exchange divided by population, and IPOs is the average ratio of the equity issued by newly listed firms to GDP.
Ownership concentration is the average percentage of common shares owned by the top three shareholders in the ten largest non-financial, privately-owned domestic firms. Panel B includes
three additional measures of a healthy financial market. Turnover is total value of shares traded divided by average market capitalization and Private sector credit is the amount of domestic
credit provided to the private sector by financial corporations as a percentage of GDP, both from WDI 2014. Trust index and values index are as described in Appendix A and Table 1. Time
to collect is the Djankov et al. 2003 log of calendar days of the judicial procedure to collect on a bounced check. Log GDP pc is the log of GDP per capita measured in 2012 or closest year
available. Standard deviations are reported in parenthesis. ***, ** and *denote significance at 1%, 5%, and 10%, respectively.
Panel A:
Dep. Var:
Trust index
Values index
Time to collect
Constant
Observations
Adj. R2
Market capitalization
(1)
(2)
100.077***
-27.761
48.517
-34.841
-18.334**
-30.239**
-9.001
-14.01
108.146**
190.784**
-52.485
-84.48
46
54
29%
12%
Panel B:
Dep. Var:
Turnover
(1)
Trust index
44.420*
(26.497)
Values index
Time to collect
Constant
Observations
Adj. R2
(2)
-12.910
(11.553)
109.832*
(62.061)
46
5%
Control premium
(3)
(4)
-0.166**
(0.066)
-0.099*
(0.051)
0.039**
0.069***
(0.015)
(0.019)
-0.018
-0.188**
(0.096)
(0.088)
31
33
21%
12%
Private sector credit
(3)
(4)
Log GDP pc
(5)
61.604**
(26.553)
42.827*
(23.485)
-18.606
(11.709)
133.032**
(62.260)
54
6%
-28.325**
(11.351)
204.692**
(65.456)
44
20%
(6)
1.636***
(0.324)
85.121**
(24.297)
-36.482**
(12.032)
230.294***
(63.607)
51
28%
-0.179
(0.106)
9.863***
(0.597)
45
33%
45
Ln firms/pop
(5)
(6)
1.870**
(0.652)
1.955**
(0.638)
-0.319*
-0.339
(0.167)
(0.220)
2.915**
3.003**
(0.940)
(1.225)
48
56
17%
11%
1.985***
(0.352)
-0.255**
(0.116)
10.109***
(0.673)
53
40%
IPOs
(7)
5.230**
(1.648)
-0.349
(0.672)
2.012
(3.876)
37
20%
(8)
2.240
(1.649)
-1.337*
(0.763)
8.587**
(4.189)
38
5%
Ownership concentration
(9)
(10)
-0.172**
(0.079)
-0.124*
(0.074)
0.067*
0.086**
(0.034)
(0.031)
0.202
0.081
(0.207)
(0.160)
39
38
21%
17%