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Instrumental Variables Analysis and the Role of National Culture in Corporate Finance.

Academic interest in examining the relation between national culture and economic outcomes (or the "culture and finance" literature) has increased significantly over recent years. This is because national culture affects an individual's beliefs and preferences, which then drives decisions, affecting economic outcomes (Guiso, Sapienza, and Zingales, 2006). The findings of papers comprising the culture and finance literature may be affected by mismeasurement of national culture, or by omitted variables that may be correlated both with measures of national culture and with the economic outcome being studied. To mitigate concerns about mismeasurement, or omitted variables, and demonstrate causality, Guiso et al. (2006), Licht, Goldschmidt, and Schwartz (2007), Ahern, Daminelli, and Fracassi (2015), Eun, Wang, and Xiao (2015), and many other of the culture and finance papers use instrumental variables analysis (IV analysis hereafter).

The purpose of this study is to review those instruments, consider whether each satisfies the requirements of a good instrument, and provide the sources of data to form the respective instrumental variables. Overall, our survey is designed to allow authors to evaluate the strengths and weaknesses of recently used empirical instruments. Also, as we review the theoretical foundations for the recently used instruments, we separately recognize potential new instruments (which we propose for possible use in future IV analyses).

This article is important because, as exemplified in a recent (Spring 2016) issue of Financial Management (e.g., El Ghoul et al., 2016), the finance literature has increasingly argued that differences in national culture are potential sources of variation in cross-national decision making. More important, there appears to be much more that can be learned. Karolyi (2016) notes that relative to other business disciplines, finance has been slow to embrace the explanatory power provided by a rigorous examination of the impact of national culture and concludes that "there is much potential yet for national culture to help us understand cross-border activities of firms and investors" (p. 624).

However, this culture and finance research, like many empirical endeavors in financial economics, is subject to endogeneity concerns. The ability to fulfill the research potential postulated by Karolyi (2016) requires that these issues be addressed (such as through the use of IV analysis). Our survey is designed as a guide to help future authors decide which instrumental variables may be most appropriate given specific empirical settings.

If IV analysis helps resolve endogeneity concerns by forging a causal chain between national culture and economic outcomes, the weakest link may be the economic justification for the selection of particular instruments. Specifically, Larcker and Rusticus (2010) evaluate a 10-year sample of top accounting journals and find that 80% of the studies using IV techniques provide no discussion regarding the choice of instruments. Accordingly, another contribution of this article is to help future authors overcome this methodological weakness by not only identifying potential instruments, but also by providing theoretical and empirical justification for selecting specific instrumental variables.

Additionally, we offer the more utilitarian contribution of presenting detailed sources of data for each variable. Although we should select potential instruments based primarily on the ability to satisfy the econometric criteria of a good instrument (i.e., the relevance condition and the exclusion condition), data availability is another factor to consider. Therefore, in our subsequent discussion and in the Appendix, we provide numerous source citations to access the data we discuss.

We organize the remainder of this article as follows. Section I describes the requirements of a good instrument. Section II reviews primary measures of national culture. In studies of the impact of national culture on economic outcomes, these measures of national culture represent the potentially endogenous variables for which IV analysis is designed to control. In Section III, we identify potential instrumental variables. During our discussion, we provide economic justification for each instrument, assess its ability to fulfill the requirements of a valid instrument, and analyze its potential shortcomings. Section IV presents our conclusion.

I. Requirements for Good Instrumental Variables

For an instrument to provide reliable estimates, it must meet two important requirements. First, the instrument must be correlated with the endogenous variable (relevance condition) after controlling for all other exogenous variables. Second, the instrument should only affect the outcome variable through its effect on the endogenous variable (exclusion condition).

A. Relevance Condition

In our subsequent analysis, we empirically test the relevance condition by examining the correlations between each candidate instrument and each potentially endogenous measure of national culture. The pairwise correlations presented throughout this article provide an initial (though incomplete) test of the relevance condition. Our univariate tests offer some evidence of an instrument's ability to satisfy the relevance condition by demonstrating whether the instrumental variable is correlated with the endogenous treatment variable. However, this is not a definitive test because a relevant instrument must be correlated with the endogenous treatment variable after accounting for all control variables. (1) Nevertheless, we feel that the pairwise correlations we discuss are valuable because an instrument that is not correlated with a treatment variable in a univariate setting is also less likely to be correlated with the treatment variable after accounting for all other control variables.

B. Exclusion Condition

Conditioned on controls included in the models, the instrument should have no direct impact on the outcome under study (other than through the effect on the endogenous factor). The exclusion restriction is violated if the outcome variable is affected by additional factors that are also correlated with the instrument. Because the exclusion condition mandates that the instrument be uncorrelated with any unobserved variables influencing the outcome under study, empirical tests of the exclusion restriction must be inferred because observing the unobserved variable is not possible. Prior scholars have frequently conducted overidentification tests. However, these are not tests of exogeneity, but rather tests of whether the additional restrictions imposed by having additional instruments are valid (Parente and Santos Silva, 2012).The most popular overidentification tests are from Hansen (1982) and Sargan (1958).

Because the exclusion restriction is untestable, it is imperative that the researcher build a strong theoretical case for the use of a specific instrument. Section III is designed to provide the theoretical justification for each potential instrument and thus address each instrument's ability to satisfy the exclusion restriction.

II. Measuring National Culture

A primary challenge in measuring national culture is first being able to define national culture. Hofstede (1980) regards culture as "the collective programming of the mind which distinguishes the members of one human group from another" (p. 25). Guiso et al. (2006) define culture as "those customary beliefs and values that ethnic, religious, and social groups transmit fairly unchanged from generation to generation" (p. 23). Synthesizing commonalities from these and other definitions of culture, Taras, Rowney, and Steel (2009) observe that most depictions of culture involve complex, multilevel constructs that are cast over extensive periods of time and are therefore relatively stable. Zingales (2015) further notes that cultural constructs are frequently couched in terms of beliefs (i.e., priors) and values (i.e., preferences). As such, the concepts of culture may be incorporated into neoclassical economic models driven by individual preferences.

Another important step is differentiating national culture from corporate culture. Weber, Shenkar, and Raveh (1996) note that national culture (following a Hofstede-esque specification) is predicated on broad and deeply held values whereas corporate culture is defined by specific operational practices. Hofstede (1991) similarly observes that national cultures are based on values; corporate cultures are based on practices within companies. Corporate culture is therefore considered unique to a particular organization and its market and environment (Schein, 1985; O'Reilly and Chatman, 1996; Tharp, 2009; Martin and Frost, 2012; Ferrell, Fraedrich, and Ferrell, 2013; Graham et al., 2016). In our article, although we recognize the importance of corporate culture, we focus on national culture.

In the culture and finance literature, the most widely used paradigms for measuring national culture are from Hofstede, Schwartz, and the World Values Survey (WVS). The following offers a brief introduction to each framework. See the Appendix S1 for further detail.

A. Hofstede

Hofstede (1980) concludes that national cultures address four primary paradigms: 1) the relationships between the individual and the group (Individualism vs. Collectivism), 2) the ability to tolerate uncertainty (Uncertainty Avoidance), 3) the inequitable distribution of power (Power Distance), and 4) the social implications of gender (Masculinity). Hofstede argues that each of his cultural value dimensions provides a bipolar spectrum of possible responses to cope with these four major issues.

Hofstede more recently identifies two additional cultural value dimensions: Long-Term Orientation (vs. Short-Term Orientation) and Indulgence (vs. Restraint). The Long-Term Orientation variable (or LTO) focuses on the degree to which each society allocates effort between maintaining connections with the past and focusing on the challenges of the present and the future. Hofstede defines Indulgence (vs. Restraint) (or IVR) as a national-level measure of happiness, primarily assessed from a hedonistic perspective. Because these new measures have not been widely adopted in the culture and finance literature, we defer the evaluation of instruments for LTO and IVR until these variables are more broadly applied.

B. Schwartz

Like Hofstede, Schwartz (2006) has designed a framework of cultural value dimensions that focuses on values. His three value dimensions (and the polar orientations of each) are: Embeddedness/Autonomy, Egalitarianism/Hierarchy, and Harmony/Mastery.

A society that Schwartz (2006) scores as high in terms of Embeddedness emphasizes maintenance of the status quo, protection of group solidarity, and cultivation of favorable relationships within the group and within the broader society. If a society is highly Autonomous (the opposite spectrum of this cultural dimension), individuals are perceived as independent actors, and each person is considered a bounded entity who is free to pursue independent interests. (2)

Egalitarianism (vs. Hierarchy) reflects how a society recognizes potential inequities within the social order. Schwartz (2006) specifies that a more Egalitarian culture emphasizes equality and selfless commitment to promoting the welfare of others, whereas a highly Hierarchical culture legitimizes the unequal distribution of authority and stresses strict observation of role obligations. (3)

Schwartz (2006) defines a society that is high in Mastery as exhibiting a preference for active determination of one's destiny, ambitious self-assertion, and rigorous efforts to control the natural or social environment. At the opposite end of the spectrum, Harmony refers to a societal perspective that accepts the world as it is and emphasizes comprehension rather than domination.

C. WVS Variable: Trust

To measure the cultural dimension of Trust, Guiso, Sapienza, and Zingales (2003, 2006, 2009), Aghion et al. (2010), Ahem et al. (2015), and many others rely on responses to various waves of questionnaires that comprise the WVS (i.e., World Values Survey) and specifically draw from the WVS item focusing on the generalized level of trust. The generalized-trust question provides input for the most ubiquitous assessment of Trust. That question reads: "Generally speaking, would you say that most people can be trusted or that you can't be too careful in dealing with people?"

D. Reviews and Critical Assessments of the Measures of National Culture

The Hofstede variables have been the most widely used measures of national culture in empirical research (e.g., Sondergaard, 1994; Sivakumar and Nakata, 2001; Kirkman, Lowe, and Gibson, 2006; Tsui, Nifadkar, and Ou, 2007; Taras, Kirkman, and Steel, 2010; Yong, Hooper, and Northcutt, 2011). Nevertheless, the Hofstede cultural value dimensions have not been immune to criticism. Two of the primary concerns plaguing Hofstede's metrics involve the time relevance of his data and the generalizability of his findings. The time relevance issue arises because Hofstede collected his primary data from 1968 to 1973. As such, Schimmack, Oishi, and Diener (2005), Kirkman et al. (2006), and Sondergaard (1994) question whether Hofstede's metrics may be artifacts of his window of analysis and thus may be less reliable in more recent applications. Also, because Hofstede acquired his data from surveys of IBM employees, Schimmack et al. (2005) and Sondergaard (1994) cite concerns regarding whether Hofstede's cultural value dimensions are valid in other organizational and social settings. The meta-analysis from Taras et al. (2010) focuses on these two issues (i.e., time relevance and generalizability) as well as other criticisms and concludes by offering strong support for the use of Hofstede's cultural value dimensions.

Most relevant for our study, Karolyi (2016) performs a rigorous, circumspect analysis of the variables used in the culture and finance literature. Summarizing earlier critical works by Shenkar (2001), McSweeney (2002), Ailon (2008), and others, the survey by Karolyi (2016) recognizes that Hofstede's measures of national culture exhibit an inherent "fragility," primarily attributable to embedded assumptions in their statistical formulation. Citing work initially by Shenkar (2001), Karolyi (2016) explicitly cautions of various "illusions" in the cultural constructs. Of the criticisms that Karolyi (2016) addresses, perhaps the most germane for our study is Shenkar's (2001) "illusion of causality" (which predominantly stems from a perceived lack of sufficient evidence to establish a causal relation between national culture and economic outcomes). Recognizing a potential econometric antidote, Karolyi (2016, p. 615) praises Ahem et al. (2015) for addressing the "illusion of causality" through IV analysis. Therefore, concerns regarding Shenkar's (2001) illusion of causality provide additional motivation for our article, as the purpose of IV analysis is to provide evidence of a causal relation and thus demonstrate that culture's effect on economic outcomes is not illusionary.

Karolyi (2016) concludes by recognizing the benefits from using measures of national culture. Karolyi (2016) writes, "Notwithstanding the conceptual and methodological problems in measurement of cultural values or the distances between them across countries, I would be remiss in failing to point to the enormous evidence of the resilience of the scholarly work using these measures" (p. 615). Karolyi (2016) further acknowledges the incremental explanatory value of measures of national culture and, after independently verifying their statistical significance, encourages the cautious use of these variables in future economic analysis.

Overall, these reviews and critical analyses broadly conclude that the primary measures of national culture, despite being imperfect, are valuable, widely used, and empirically validated tools. Identifying good instruments will allow these tools to be even more effectively used in future empirical work.

III. Instrumental Variables Used in the Culture and Finance Literature

We next describe the instruments previously used in the culture and finance literature. We seek to document the type of background evidence that supports the use of specific instruments and provides building blocks for an author's theoretical argument regarding the ability of an instrument to satisfy the exclusion condition. Separately, when relevant, we draw from our review of the literature to suggest additional candidate instruments that, although not used in prior empirical work, may be valuable in future studies involving IV analysis. For each instrument, we then conduct analysis to consider whether each instrument appears likely to fulfill the requirements of the relevance condition and the exclusion condition.

To offer preliminary evidence of each instrument's ability to meet the relevance condition, we calculate the statistical correlations between the potential instruments and the various cultural variables. We report these findings later in Tables I-VIII. (4) However, we caution that these univariate results are not final evidence of each instrument's ability to meet the relevance condition. The ultimate test requires measuring the instrument's correlation with the endogenous variable after accounting for all control variables in the study.

A valid instrument must also satisfy the exclusion condition. Satisfying the exclusion restriction is predicated on the author's assertions (which must be supported by theoretical arguments). Additionally, an instrumental variable that affects an outcome variable through multiple channels will not meet the exclusion condition. As such, even though we cannot conduct a formal test, we attempt to caution future authors of instruments that may be less likely to satisfy the exclusion condition.

We also recognize other potential shortcomings of the potential instrumental variables. For example, data availability represents a pragmatic and potentially frustrating concern to the empiricist. Therefore, to offer evidence of each potential instrument's availability, we report the proportional coverage of the specific variable within our sample.

To provide the raw materials for our analysis, we collect data from 42 developed and developing countries. We use these data to form each of the potential instruments we identify through our review of the culture and finance literature. In all, we compile 19 potential instruments. We present all data in the Appendix S3.

A. Instrumental Variables for Individualism

Because cross-cultural psychologists recognize that the Individualism/Collectivism dimension is the primary determinant of cultural variation (Heine, 2007), it is not surprising that Hofstede's measure of Individualism is the most frequently used variable in the culture and finance literature. Table I presents the results of our statistical analysis of the potential instruments for Individualism.

1. Genetic Distance (FST-US)

Gorodnichenko and Roland (2011a, 2011b, 2017) argue that genetic data provide valid instrumental variables required to convincingly demonstrate that national culture has a causal effect on economic outcomes. To quantify genetic heterogeneity, Ahem et al. (2015), Bryan, Nash, and Patel (2015), Eun et al. (2015), El Ghoul and Zheng (2016), Griffin et al. (2018), and Gorodnichenko and Roland (2011a, 2011b, 2017) use a fixation index (FST distance) developed initially by Cavalli-Sforza, Menozzi, and Piazza (1994). The FST index takes on higher values for larger genetic distance. In the culture and finance literature, the primary measure of genetic distance is based on frequencies of blood types.

Using genetic distance as an instrument for Individualism, Eun et al. (2015), Griffin et al. (2018), and Gorodnichenko and Roland (2011a, 2011b, 2017) follow the frontier method as outlined by Spolaore and Wacziarg (2009). The "frontier" is the country with an outlier value for a particular characteristic. In studies of the effect of Individualism, the United States serves as the frontier because the United States scores highest on Hofstede's Individualism index. Therefore, Eun et al. (2015), Griffin et al. (2018), and Gorodnichenko and Roland (2011a, 2011b, 2017) use genetic data as an instrument for Individualism by considering genetic distance relative to the United States. Our label for the measure of a country's FST distance relative to the United States is FST-US.

To provide preliminary evidence of the ability of FST distance to potentially satisfy the relevance condition, we consider the strength of its correlation with Hofstede's measure of Individualism. Our results in Table I indicate a highly significant relation between FST-US and Individualism (p-value = 0.0001).

Because the exclusion condition cannot be tested, the author should primarily address an instrument's ability to meet the exclusion condition through theoretical arguments. Gorodnichenko and Roland (2017) provide an excellent example of how such a supposition can help substantiate that a particular instrumental variable meets the exclusion restriction. Gorodnichenko and Roland (2017) face the challenge of demonstrating that FST distance (i.e., genetic distance) is a valid instrument for Hofstede's measure of Individualism (in a study of the effect of Individualism on the levels of national income). Gorodnichenko and Roland (2017) write, "Since there are no identified direct genetic causes for why some countries become wealthier than others, genetic distance can be argued to satisfy the exclusion restriction" (p. 403). The key word in this passage is "argued" because the authors present a theoretical argument that the instrument will only affect the outcome variable through its effect on the endogenous factor.

Further bolstering the assertion that FST distance meets the exclusion condition, Gorodnichenko and Roland (2011b, 2017) emphasize that the frequency of blood types (i.e., what is explicitly measured in FST distance) is a neutral genetic marker. The key word in this context is "neutral." Drawing from the scientific literature, Gorodnichenko and Roland (2011b, 2017) note that neutral genetic characteristics have a neutral impact on evolutionary fitness and thus should have a neutral impact on economic outcomes (such as those studied in the culture and finance literature). Specifically, Gorodnichenko and Roland (2017) state that differences in blood types (the basis for the FST instrument) have no direct effect on national income (the study's outcome variable) other than through the impact on Individualism/Collectivism. Therefore, differences in blood types should plausibly fulfill the exclusion condition.

Satisfying the exclusion condition requires that the outcome variable is not affected by unobserved factors that are also correlated with the instrument. In addition to making a theoretical case for why the instrument is uncorrelated with any unobserved variables, the author may help strengthen these assertions by including additional control variables. For example, Gorodnichenko and Roland (2011a, 2011b) further support the contention that FST-US meets the exclusion condition by explicitly controlling for a variety of factors (such as legal origin, geography, and religion) that may be correlated with both the instrument (FST-US) and the study's outcome variable. Although it is infeasible for models to include every factor possibly correlated with the instrument and with the outcome variable, adding control variables may enhance the credibility of an author's claims of satisfying the exclusion restriction.

Furthermore, Hamermesh (2000) contends that the most plausible instruments should be predetermined or occur as "acts of God" (i.e., events that are beyond the decision maker's control). Because they plausibly meet these criteria, genetic characteristics (such as FST distance) may be especially effective as instrumental variables.

2. Allele Frequency (Prevalence of S-Allele and G-Allele)

Chiao and Blizinsky (2010) and Way and Lieberman (2010) argue that genetic variation in neurotransmitters, by calibrating sensitivity to social stress, may influence the degree of Individualism (or Collectivism) within a particular society. Supporting this supposition, Chiao and Blizinsky (2010), Way and Lieberman (2010), and Caspi et al. (2003) find that collectivistic cultures are more likely in countries where a larger proportion of the population carry the short allele of the 5-HTTLPR gene (a serotonin transporter). Gorodnichenko and Roland (2011b, 2017) use the country-level prevalence of this genetic characteristic (i.e., short allele or the S-allele of the 5-HTTLPR gene) as an instrument for Individualism/Collectivism.

Also, Gorodnichenko and Roland (2011b) and Way and Lieberman (2010) note that a functional polymorphism in the [mu]-opioid receptor (i.e., the rampancy of the G-allele in the Al18G gene) regulates sensitivity to social alienation. Recognizing that this genetic trait (i.e., G-allele) appears more frequently in Collectivist cultures, Gorodnichenko and Roland (2011b) use the prevalence of the G-allele in the Al18G gene as an instrument for Hofstede's measure of Individualism/Collectivism.

From the perspective of the relevance condition, the S-allele prevalence (S-Allele) and the G-allele prevalence (G-Allele) appear to be good instruments. We report in Table I that both variables are very highly correlated with Hofstede's measure of Individualism.

As documented in the previous section, the genetic-based variables may be persuasively argued to satisfy the exclusion condition. In building a theoretical case for the use of the S-Allele and the G-Allele as instruments for Hofstede's Individualism/Collectivism measure, Gorodnichenko and Roland (2017) reference studies from the genetics and psychology literature and conclude, "The two genetic variables are not plausibly correlated to income per capita through any channel other than collectivism" (p. 403).

However, although the two measures of allele frequency appear to have the statistical characteristics of good instruments, data availability may be a shortcoming that hinders the empirical application of these variables. Gorodnichenko and Roland (2017) lament, "Unfortunately, crosscountry coverage is limited to approximately forty countries for the two genetic variables, which are perhaps the cleanest IVs one can currently obtain in this kind of work" (p. 403). In Table I, we confirm the restricted level of data availability within the sample of countries from which we draw data. If an author included a different set of countries, it is possible that the allele-frequency variables might provide greater levels of data availability. Nevertheless, we note this limitation for these potential instruments.

3. Pathogens

Providing a geographically inspired view on cultural development, Faulkner et al. (2004), Park, Schaller, and Crandall (2007), Fincher et al. (2008), and Sagiv and Schwartz (1995) present evidence that social phenomena (e.g., national culture) may provide an antipathogen defense mechanism. That is, in a society more at risk for contagious disease, a more Collectivistic (less Individualistic) society may evolve to mitigate exposure to new pathogens. Offering evidence that cultural attributes may provide an antipathogen function, Fincher et al. (2008) find a strong negative relation between Individualism and the historical prevalence of pathogens. Accordingly, Gorodnichenko and Roland (201 lb, 2017) and Boubakri et al. (2016) use historical pathogen prevalence (Pathogen) as an instrument for Individualism.

As an alternative to using germs to measure the prevalence of pathogens, weather-based variables may be valuable in modeling pathogen prevalence, as climate affects the transmission of infectious diseases (Sachs, 2000). Therefore, we propose that another geographically related characteristic (incidence of frost, or Frost) may also be used as an instrument for Individualism. That is, because frost kills pathogens, we expect that a more individualistic society will evolve in an environment in which frost is more prevalent.

Supporting the contention that the Pathogen variable will satisfy the relevance condition, Table I indicates that Pathogen is highly correlated with Hofstede's measure of Individualism. Also, consistent with our expectation, the Frost variable is similarly strongly correlated with the Individualism metric (and thus additionally appears likely to meet the relevance condition).

Of the new variables that we propose, Frost appears especially worthy of further consideration. The use of the Frost variable is buttressed by interesting theoretical justifications (e.g., Engerman and Sokoloff, 1997; Sokoloff and Engerman, 2000; Acemoglu, Johnson, and Robinson, 2001; Easterly and Levine, 2003), is highly correlated with Individualism, and is readily available.

More broadly, because they are predetermined factors, geographically based characteristics (such as Pathogen and Frost) may be especially effective as instrumental variables. Supporting the value of using geographic factors as instruments, Rodrik, Subramanian, and Trebbi (2004) note, "Geography is as exogenous a determinant as an economist can ever hope to get" (p. 133). Also, Pathogen seems particularly attractive as an instrument in that it reflects the historical prevalence of pathogens, which further mitigates concerns of reverse causality. Its theoretical justification is corroborated by our findings for the Frost variable.

However, in certain empirical settings, the use of pathogen prevalence as an instrument may be threatened by the exclusion condition. Acemoglu and Johnson (2005) and Acemoglu et al. (2001, 2002) recognize significant differences in the quality of institutions developed in colonies where a large number of Europeans actually established permanent residence (i.e., Settlement colonies) as opposed to colonies that the Europeans did not primarily inhabit but instead used as providers of resources to remove and export (i.e., Extractive colonies). Acemoglu and Johnson (2005) and Acemoglu et al. (2001, 2002) hold that Europeans were inclined to form Settlement colonies in geographically hospitable environments. Specifically, Europeans were more likely to settle in places where they were less likely to die (i.e., low pathogen prevalence). Conversely, Acemoglu et al. (2001) contend that Europeans established Extractive colonies in areas of higher settler mortality. In such inhospitable regions, the colonial powers were more likely to impose absolutist institutions (as opposed to the Settlement colonies where more effective institutions were established). As such, by affecting the formation of a nation's institutional infrastructure, pathogen prevalence may influence a study's outcome variable through multiple channels (which would raise concerns regarding the exclusion restriction). Accordingly, if the study's outcome variable is especially sensitive to the nation's institutional environment, the use of this type of instrument may be less desirable.

4. Language: Pronoun Use

Kashima and Kashima (1998) argue that a language's rules regarding the potential omission of subject-indexing pronouns (also known as "pronoun drop") reflect a culture's perspective on the relation between the individual and the group. Languages requiring person-indexing pronouns (such as "I" in English) place greater emphasis on the subject by explicitly distinguishing the speaker from the general context. Conversely, other languages license the omission of the subject pronoun. These pronoun-drop languages remove the spotlight from the speaker and instead convey a more entrenched portrayal of the speaker as cast within the broader social backdrop. In recent empirical studies, Griffin et al. (2017, 2018), Liang, Kwok, and Zhang (2013), El Ghoul and Zheng (2016), and Gorodnichenko and Roland (201 lb, 2017) use pronoun drop as an instrument for Individualism.

Regarding the relevance condition, the pronoun drop variable (Pronoun) appears to be a strong candidate as an instrument for Individualism. Table I reports a very high correlation between Pronoun and Hofstede's measure of Individualism, and indicates that data are readily available for this variable.

When considering the exclusion condition, language-based variables (such as Pronoun) appear viable. For example, in a study of the effect of national culture on corporate governance, Licht et al. (2007) assert that the Pronoun variable satisfies the exclusion condition. Specifically, Licht et al. (2007) argue, "Second, it is plausible to assume that the language instrument satisfies the exclusion restrictions in that it does not exert an influence on governance other than through culture. We find no claims that link grammar to governance or to any of the factors mentioned as relevant to governance institutions in the literature" (p. 673).

B. Instrumental Variables for Uncertainty Avoidance

We next review the instruments used for Hofstede's measure of Uncertainty Avoidance. Table II presents the results of our analysis.

1. Religion

Hofstede (1983) argues that cultures high in Uncertainty Avoidance establish societies emphasizing order and predictability, and gravitate toward religions that are more rigidly structured and more likely to claim absolute truth. La Porta et al. (1997) note that Hierarchical religions (such as Catholicism) delineate strict, vertical bonds of authority that may help instill the order and structure favored in a culture ranking high in Uncertainty Avoidance. La Porta et al. (1997, 1999) specify that Catholic, Greek Orthodox, and Muslim religions are considered the most Hierarchical. Accordingly, El Ghoul and Zheng (2016), Li et al. (2013), and Kwok and Tadesse (2006) use religion as an instrument for a culture's tolerance for uncertainty (Uncertainty Avoidance). The prevalence of Hierarchical religions should be positively related to Uncertainty Avoidance whereas the prevalence of other religions (such as Protestantism) should be negatively related to Uncertainty Avoidance.

Table II indicates that religion-based variables appear to satisfy the relevance condition required of a good instrument. Within the context of our sample, Protestant and Hierarchical are strongly correlated with Uncertainty Avoidance. Regarding other potential shortcomings, data for Protestant and Hierarchical are widely accessible (based on our sample).

Despite the promising features of Protestant and Hierarchical, we caution that authors should be careful when using religion-based variables in certain empirical settings. Specifically, Stulz and Williamson (2003) demonstrate that religion has significant explanatory power in understanding cross-sectional variation in legal systems. If the legal system also affects the outcome under study, religion may affect the outcome variable through multiple channels and thus would not satisfy the exclusion restriction as an instrument for Uncertainty Avoidance.

Furthermore, we recognize that religion, instead of being an antecedent, might actually be considered simply a part of culture. As such, there may be issues of causality in that it may be indeterminate whether religion causes culture or culture causes religion. We understand these concerns and acknowledge that, in certain empirical settings, religion may be a more specious instrument than many of the others we consider.

2. Language: Second-Person Pronoun

Kashima and Kashima (1998) find that nations speaking languages that require multiple second-person pronouns score significantly higher on Hofstede's Uncertainty Avoidance index. These languages stipulate that the speaker must choose the form of the second-person pronoun as dictated by social status and/or familiarity with the addressee. Kashima and Kashima (1998) propose that this linguistic obligation to continuously monitor the discourse and choose the acceptable second-person pronoun burdens the speaker with "decisional stress." This decisional stress may contribute to a greater concern with ambiguity (i.e., a higher level of Uncertainty Avoidance). Accordingly, Griffin et al. (2017) and Griffin et al. (2017, 2018) form an instrument for Uncertainty Avoidance based on whether a majority of a country's population speaks a language with multiple second-person pronouns (2P Pron).

Table II presents our measure of the correlation between the 2P Pron variable and Hofstede's Uncertainty Avoidance index. Our finding of a strongly significant relation provides support for the ability of 2P Pron to meet the relevance condition. Additionally, as we note in Table II, data availability for this variable is not a concern. Finally, Section III.A.4 documents theoretical arguments supporting the assertion that language-based instruments (such as 2P Pron) are likely to satisfy the exclusion restriction.

C. Instrumental Variables for Power Distance

Unlike Hofstede's measures of Uncertainty Avoidance and (especially) Individualism, the Power Distance metric has seen limited use in the culture and finance literature. Nevertheless, we identify potential instruments. Table III reports the results of our empirical analysis of potential instruments for Power Distance.

We identify two potential instruments for Hofstede's Power Distance: history of communist rule (CommHist) and a Latin colony (Latin Col) indicator.

Analyzing the antecedents of a society's level of Power Distance, Cullen (2001) emphasizes the importance of historical factors. Licht, Goldschmidt, and Schwartz (2005) further support the use of historically determined events as instruments by designating major historical occurrences as "truly exogenous variables" (p. 245). Accordingly, our search for instruments for Hofstede's Power Distance index (PDI) focuses on historical factors. We follow Siegel, Licht, and Schwartz (2013) and consider the history of communist rule as an exogenous shock that may serve as an instrument for PDI. Explicitly linking history of a communist government to a nation's level of Power Distance, Carl, Gupta, and Javidan (2004) note that communist political systems perpetuate status inequality through the stratification of authority. Thus, by legitimizing societal inequities, the instatement of a communist regime should contribute to a nation's higher score on Hofstede's PDI.

A nation's colonial origin may also serve as a historically determined instrument for Power Distance. Licht et al. (2007) note that the significant differences in the cultural development of many nations may be traced to the colonizer. Acemoglu et al. (2001), Sokoloff and Engerman (2000), Easterly and Levine (2003), and Engerman and Sokoloff (1997) document that in Extractive states, the colonial authorities designed institutions to consolidate power and facilitate the exploitation of the indigenous population and the natural resources. In such environments, large class differences emerged and social stratification was reinforced by authoritative and absolutist states. As a result, the cultures of countries with a colonial history as an Extractive state exhibit large degrees of Power Distance (high PDI). Conversely, in Settlement states, a robust middle class developed, and power and wealth were more widely distributed. As such, the cultures of these nations feature lower degrees of Power Distance (low PDI). Primarily because of factor endowments of the native ecologies, Latin nations were more likely to establish Extractive states whereas the factor endowments of areas colonized by the British were typically more conducive to founding of Settlement states. We use an indicator variable (Latin Col) to specify a colony as "Latin" if the colonizer-country speaks a Latin-based language (e.g., Spanish, Portuguese, or French). Supporting the use of this colonial heritage indicator variable, Licht et al. (2007) contend, "Such a dummy variable is consistent with each and any of the accounts that distinguish British from other (mostly Latin) colonization" (p. 676). Accordingly, we expect a positive and strong correlation between Latin colonizer (Latin Col) and the nation's Power Distance score.

The results in Table III show that both of the historically determined variables (CommHist and Latin Col) are highly correlated with Hofstede's PDI. This suggests that both potential instruments may meet the relevance condition. Furthermore, focusing on availability of data, we find that both variables appear to be suitable.

However, we caution that concerns regarding the exclusion condition may complicate the use of colonial history as an instrument in certain empirical settings. Specifically, La Porta et al. (1998, 1999), Easterly and Levine (2003), Mauro (1995), Sokoloff and Engerman (2000), and North (1988) identify that colonial origin plays a pivotal role in many aspects of a nation's institutional evolution. For example, La Porta et al. (1998, 1999) document a direct relation between colonization and the nation's legal system, the adoption of which has had a cascading effect on the nation's financial and institutional development. If a study's outcome variable is affected by both national culture and other institutional factors (and both are correlated with colonial origin), an instrument based on colonial origin would not satisfy the exclusion restriction.

D. Instrumental Variables for Masculinity

Because the fourth of Hofstede's cultural value dimensions (Masculinity/Femininity) is used less frequently in the culture and finance literature, we identify limited candidates for its possible instruments. Table IV presents the results of our analysis of potential instruments for Hofstede's Masculinity variable.

1. Genetic Distance (FST-Japan)

El Ghoul and Zheng (2016) develop a genetically based instrument for the Hofstede measure of Masculinity by calculating genetic distance of each sample country relative to Japan (the country with the highest Masculinity score). We label each nation's FST distance relative to Japan as FST-Japan. This variable is analogous to the FST distance relative to the United States (FST-US) that is used effectively as an instrument for Individualism. See Section III.A.1 for a description of the favorable characteristics of FST distance (i.e., FST-US) when used as an instrument for Individualism. The same favorable attributes (such as the ability of FST distance to plausibly satisfy the exclusion restriction) should apply when using FST-Japan as an instrument for Masculinity.

Although FST-Japan has a significant correlation with Masculinity based on E1 Ghoul and Zheng's (2016) sample, such a strong statistical relation does not exist in our sample. However, as noted by Roberts and Whited (2013), meeting the relevance condition requires that the instrument be strongly correlated with the endogenous regressor after partialling out the impact of all control variables (which is not equivalent to a univariate correlation with the endogenous factor).

2. Climate

Tang and Koveos (2008) and Hofstede (2001) identify an association between the nation's climate and its ranking on Hofstede's Masculinity/Femininity spectrum. These authors contend that a warm climate contributes to the formation of a more Masculine culture. This observation is consistent with the Parental Investment theory (as described by Van de Vliert et al., 1999; Den Hartog, 2004). This theory holds that greater male involvement in caring for the family is necessary in more extreme conditions to ensure survival in unforgiving environments (which leads to reduced differences in gender roles). The degree of asymmetry between gender roles affects a country's ranking on Hofstede's Masculinity/Femininity spectrum. A larger difference in gender roles contributes to a more masculine-oriented culture. Because Van de Vliert et al. (1999) present empirical evidence supporting this possible relation between climate and culture, we propose that characteristics of a nation's climate (such as its average temperature) may serve as instrumental variables for the nation's ranking on Hofstede's Masculinity/Femininity scale.

However, upon further review, the applicability of our proposed variable (TempAvg) appears dubious in that our data (summarized in Table IV) do not indicate a significant correlation with Hofstede's measure of Masculinity. Also, as identified in Section III.A.3, weather-based instruments may face challenges regarding the exclusion condition.

D. Instrumental Variables for Egalitarianism

We next consider potential instruments for the measures of national culture developed by Schwartz. In Table V, we present findings from our evaluation of the instruments for the Schwartz metric of Egalitarianism/Hierarchy.

1. Demographic Characteristics: ELF and Lang-Frac

Rodrik (2000) notes that demographic differences may lead to social conflicts (which could contribute to a less Egalitarian society). The contention that greater societal fractionalization is associated with lower Egalitarianism is consistent with Alesina and LaFerrara (2005) who conclude that people in highly fractionalized societies are less altruistic and less supportive of populist endeavors. Accordingly, El Ghoul et al. (2016) and Siegel, Licht, and Schwartz (2011, 2013) use measures of ethnic fractionalization as instruments for the Schwartz measure of Egalitarianism.

Commonly used measures of ethnic fractionalization are the Ethnolinguistic Fractionalization (ELF) index and the Lang-Frac statistic. Providing a means for quantifying ethnic differences within a country, the ELF index (Alesina and LaFerrara, 2005; Easterly and Levine, 1997; Alesina, Baqir, and Easterly, 1999) reflects the probability that two randomly selected citizens of a particular country primarily speak different languages. Similarly, the Lang-Frac metric (Alesina et al., 2003) provides an alternative measure of a nation's degree of ethnic diversity.

Offering evidence of the potential strength of both demographic variables, the results in Table V indicate that ELF and Lang-Frac are significantly correlated with the Schwartz measure of Egalitarianism. Therefore, ELF and Lang-Frac appear more likely to satisfy the relevance condition.

In an effort to meet the exclusion restriction, authors using demographic measures may build an argument similar to that supporting the use of the genetic variables. That is, like the genetic factors, demographics are predetermined, preordained characteristics. Notably, Becker (1996) highlights the importance of demography as an underlying determinant of national culture by noting that people "cannot alter their ethnicity, race or family history" (p. 16).

Identifying another potential advantage of the demographic instruments. Table V indicates that data are broadly obtainable for each measure.

2. History of Communist Rule

Licht et al. (2005), Siegel et al. (2013), and Carl et al. (2004) contend that a nation with a history of communist rule is more likely to be characterized by a more Hierarchical (less Egalitarian) culture. An exogenous shock in most countries, the implementation of communist ideology contributes to greater emphasis on Hierarchical values (Siegel et al., 2013). Furthermore, Siegel et al. (2013) and Schwartz, Bardi, and Bianchi (2000) note that communist governments, despite espousing Egalitarian platitudes, actually impose strictly Hierarchical regimes, with considerable societal inequalities and limited checks and balances over the political leadership. Siegel et al. (2013) use an indicator variable (designating whether a country experienced a period of communist rule) as an instrument for a nation's ranking along the Egalitarianism/Hierarchy spectrum. (5)

Table V provides evidence that history of communist rule (CommHist) is likely to meet the requirements of the relevance condition by indicating that CommHist is significantly correlated with Egalitarianism. As further evidence of the potential strength of this instrument, Licht et al. (2005, p. 295) specify that "truly exogenous variables" include major historical events. The CommHist indicator has the additional advantage of being based on events occurring decades ago. As such, it should be less suspect to concerns of reverse causality when used in the analysis of more recent economic outcomes.

E. Instrumental Variables for Mastery

Of the Schwartz variables, Harmony/Mastery is the least frequently used cultural value dimension in the culture and finance literature. Nevertheless, we identify several potential instruments. Table VI documents our empirical findings regarding these variables.

1. British Colony

Licht et al. (2005, 2007) and Acemoglu et al. (2001) suggest that, compared to colonization by other European powers, colonization by the British had profound social implications. These authors hold that former British colonies were generally characterized by an environment of active self-determination and self-assertion, an inclination toward venturing and entrepreneurial undertakings, and a predisposition for pragmatic change. These are the types of traits that would be used by Schwartz to position a culture along his Harmony/Mastery spectrum and register these cultures as high in Mastery and low in Harmony. Accordingly, Breuer and Salzmann (2012) and Licht et al. (2005, 2007) use colonial heritage indicator variables (specifically considering whether the British were the original colonizer) as instruments for the Schwartz value of Harmony/Mastery.

The British colony variable (Brit Col) appears to meet the relevance condition. Based on the results in Table VI, we see that Brit Col is significantly correlated (p-value = 0.0211) with Harmony. Additionally, the 100% availability of data for Brit Col adds to its appeal as an attractive instrument. Highlighting another potential advantage of Brit Col, Licht et al. (2007) emphasize that historically determined instruments are less threatened by suspicions of reverse causality.

However, potentially offsetting these favorable attributes, variables based on colonial history may have difficulty satisfying the exclusion condition. As noted in Section III.C, colonial history is argued to have affected institutional development. An instrument that may affect the outcome variable through multiple channels does not meet the exclusion condition.

2. Proportion of Population Speaking English Language

When categorizing nations into cultural groupings, Schwartz (2004) finds that English-speaking countries share distinct cultural traits. Most notably, Licht et al. (2005) report that scores on Hofstede's Harmony/Mastery spectrum are very high in English-speaking countries. This suggests that the proportion of a nation's population that speaks English (Eng-Frac) may serve as another instrument for Harmony/Mastery. Providing an advantage over the colonial origin variables, using the prevalence of spoken language as an instrument allows for the consideration of countries (such as England) that were not characterized as colonies during the past 500 years.

Table VI indicates concerns regarding the ability of the Eng-Frac variable to satisfy the relevance condition. The correlation between Eng-Frac and Harmony is not significant at conventional levels.

Further weakening its case for use as an instrument, the Eng-Frac measure may also run afoul of the exclusion condition. Specifically, Hall and Jones (1999) use Eng-Frac as an instrument for a country's level of institutional quality. Hall and Jones (1999) argue that speaking the same language as Adam Smith and the Magna Carta may predispose a nation to develop an institutional infrastructure that is more conducive to the protection of property rights, establishment of checks and balances in government, equal application of the rule of law, and enactment of other institutional characteristics favorable to economic prosperity. If Eng-Frac affects both culture (i.e., Mastery) and institutional development, it could affect a study's outcome variable (other than through the endogenous regressor) and thus violate the exclusion condition.

F. Instrumental Variables for Embeddedness

This section identifies instruments used for Embeddedness, the third measure of national culture developed by Schwartz. We identify three potential instruments: Latitude, Pronoun, and Pathogen. Table VII provides the results of our analysis of the instruments.

1. Latitude

Hofstede (2001) notes that survival in a colder climate requires greater initiative. According to the Schwartz taxonomy, a low-Embeddedness culture should be more accommodating of initiative and innovation (because a high-Embeddedness society attaches more value to respect for tradition and maintenance of status quo). As such, El Ghoul et al. (2016) use Latitude (i.e., higher latitudes are associated with colder temperatures) as an instrument for Embeddedness.

The results in Table VII indicate that the Latitude variable is highly correlated with Embeddedness. Therefore, from the perspective of the relevance condition, the Latitude variable has the makings of a viable instrument. Also, as reported in Table VII, data availability is not a concern.

However, by affecting climate, latitude may not satisfy the exclusion condition in certain empirical settings (because climate is another factor that may help distinguish Extractive and Settlement colonies). Specifically, Hall and Jones (1999), Easterly and Levine (2003), and La Porta et al. (1999) note that Europeans were more likely to settle in geographies with familiar climates. Acemoglu, Gallego, and Robinson (2014) and Hall and Jones (1999), contending that Europeans were more likely to establish Settlement colonies in climates similar to Europe, use distance from the equator (i.e., latitude) as an instrument for Western influence on the former colony's institutional development. As discussed earlier, a variable that affects both national culture and institutional development is not likely to be a valid instrument if the outcome variable may be affected by the institutional environment.

2. Language: Pronoun Use

Licht et al. (2007), Breuer and Salzmann (2012), and Chui, Kwok, and Zhou (2016) use the pronoun drop variable (Pronoun) as an instrument for the Schwartz metric of Embeddedness/Autonomy. Because the Schwartz metric of Embeddedness is conceptually similar to the Hofstede measure of Individualism (see Section II.B), it appears reasonable that there is some overlap in the instruments used for Individualism (from Hofstede) and Embeddedness (from Schwartz). Further supporting the contention that Pronoun may be used as an instrument for either of the competing measures of national culture, Kashima and Kashima (1998) report that pronoun-drop language is strongly correlated with both Individualism and Embeddedness.

The Pronoun variable appears likely to meet the relevance condition. From Table VII, our data confirm that Pronoun is strongly correlated with Embeddedness. Also, we previously document (Section III. A.4) that Pronoun appears viable from the perspective of the exclusion condition.

3. Pathogen

Similarly recognizing conceptual commonalities between the Individualism and Embeddedness metrics, Chui et al. (2016) use pathogen prevalence (Pathogen), a variable used frequently as an instrument for Individualism (see Section III.A.3), as an instrument for Embeddedness.

The data in Table VII confirm that Pathogen is likely to satisfy the relevance condition because it is highly correlated with Embeddedness. However, as noted in Section III. A.3, the use of the Pathogen variable as an instrument may be compromised by the exclusion condition.

G. Instrumental Variables for Trust

In addition to the Hofstede and Schwartz variables, measures of national culture are drawn from the WVS (e.g., Inglehart, 1999). The most commonly used metric from the WVS focuses on a society's level of trust. Table VIII provides the results from our analysis of instruments for trust.

1. Religion

Because Iannaccone (1991) notes that members of some religious groups exhibit higher amounts of trust, Guiso et al. (2006, 2009) use measures of religious affiliation as instruments for the cultural attribute of Trust. As described by Putnam (1993) and La Porta et al. (1997), Hierarchical religions emphasize that followers adhere to vertical bonds of authority within the church (as opposed to Protestant religions, which are more likely to encourage horizontal bonds of fellowship). Therefore, by potentially discouraging horizontal bonds between people, Hierarchical religions may hinder the formation of trust between members of a society. Landes (1998), Inglehart (1999), Guiso et al. (2003), and La Porta et al. (1997) document a general lack of trust in countries with dominate Hierarchical religions.

Consistent with the conclusions of Guiso et al. (2006) and Stulz and Williamson (2003), our data confirm that these religion-based variables should meet the relevance condition. Table VIII indicates that each of our candidate instruments reflecting religion (Protestant, Hierarchical, and Catholic) is strongly correlated with the WVS measure of Trust. Also, data for each religion-based instrument are obtainable for every country in our sample.

However, as we cautioned earlier, complications may arise regarding the exclusion condition. Stulz and Williamson (2003) show that religion may affect other institutional characteristics (such as the legal system) and thus may affect a study's outcome variable through factors other than through the effect on Trust.

2. Somatic Differences

DeBruine (2002) reports that people who look alike tend to trust each other. Accordingly, Ahern et al. (2015) and Guiso, Sapienza, and Zingales (2009) use differences in anthropometric measures (such as height, hair color, and dimensions of the head) as instruments for Trust. Biasutti (1954) provides cross-country data for somatic differences among 15 European countries.

Because of these data limitations (i.e., observations are available for only 15 Western European countries), we do not include somatic differences in our subsequent empirical analysis. Furthermore, unlike studies such as Ahern et al. (2015), our analysis does not focus on differences between specific pairs of countries. Nevertheless, somatic differences may be an interesting and valuable instrument for use in studies that involve a more geographically concentrated sample (e.g., an empirical setting that is restricted to Western European countries) and that consider the effect of cultural distance between pairs of countries.

3. History of Wars

Guiso et al. (2009) use the history of wars between nations as an instrument for the levels of trust between pairs of countries. Gelfand et al. (2011) contend that cultural differences may be forged in the crucible of territorial conflicts. For example, Putnam (1993) holds that the degree of trust between people often evolves through a centuries-long history of interactions. As such, historical factors (such as History of Wars) may also be exogenous determinants of the amount of trust between nations and thus may be considered as instrumental variables for the cultural dimension of Trust.

We do not include the History of Wars variable in our empirical analysis because its use requires the identification of specific pairs of countries. For example, the History of Wars data would be relevant when focusing on the degree to which people in one country trust people from another country (such as in Guiso et al., 2009).

IV. Conclusion

Interest in the role that national culture plays in explaining financial decision making has increased over recent years. However, studies of the relation between national culture and economic outcomes may be plagued by mismeasurement of national culture or by omitted variables that are correlated with measures of national culture and with the economic outcome being evaluated. To mitigate these concerns, Guiso et al. (2006), Licht et al. (2007), Ahern et al. (2015), Eun et al. (2015), and many others use IV analysis. These authors identify a rich set of exogenous instruments. We review those instruments in this article. To provide easier reference for authors seeking information regarding a specific measure of national culture, we summarize the studies we review in Table IX. We further offer guidance regarding the theoretical and economic justification for specific instruments and provide the sources of data to form the instrumental variables. Although the empirical findings in our study are specific to the sample we examine, our results should provide insight for future researchers as to which instrument to use when investigating the relation between national culture and economic outcomes.

Appendix: Variables Definitions and Sources

This appendix presents the variables we discuss in this study. It includes the measures of national culture (cultural variables) and the potential instruments. The first column lists the variable name. The second column provides a brief definition of each variable. The last column presents the source of the data used to form each variable.
Variable Name     Definition                             Source

Cultural
Variables
Individualism     Individualism (vs. Collectivism)       Hofstede (1980)
(IDV)             focuses on the relation
                  between the individual
                  and the group. Individualistic
                  societies involve loosely
                  knit social relationships,
                  emphasize self-reliance
                  and independent action, and
                  embrace personal challenge
                  and individual freedom.
                  Collectivistic societies are
                  characterized by more tightly
                  connected and cohesive
                  in-groups, where the general
                  interests of the collective
                  prevail over those of the
                  individual.
Uncertainty       The Uncertainty Avoidance              Hofstede (1980)
Avoidance (UAI)   Index (UAI) reflects a
                  society's level of
                  anxiety regarding the
                  unknown and the
                  unfamiliar. Societies ranking
                  high in Uncertainty Avoidance
                  have greater difficulties
                  in coping with ambiguity and
                  emphasize conformity, safety,
                  and predictability. Cultures
                  scoring low on the UAI
                  are more tolerant of
                  unknown and unstructured
                  situations and are more
                  willing to engage in
                  activities with indeterminate
                  outcomes.
Power Distance    The Power Distance                     Hofstede (1980)
(PDI)             Index (PDI) focuses
                  on each society's
                  solution to problems
                  resulting from social
                  inequality and reflects
                  the extent to which
                  the less powerful members
                  of a society accept the
                  legitimacy of an
                  unequal distribution of
                  authority. In a high-PDI
                  society, power is distributed
                  unequally and institutions
                  reflect and perpetuate inequities
                  in positions of authority.
                  In a low-PDI society,
                  social status and
                  authoritative status
                  are less well defined
                  and power is more
                  decentralized.
Masculinity       The Masculinity/Femininity             Hofstede (1980)
(MAS)             dimension represents a
                  society's perspective
                  regarding the social
                  implications of gender.
                  Members of a more
                  Masculine (MAS) society
                  are more assertive and
                  independent and attach
                  greater value to
                  achievement and material
                  success. Members of a more
                  Feminine society are
                  more likely to emphasize
                  interpersonal relationships
                  and are more mindful of the
                  quality of life and the
                  nurturing of others.
Egalitarianism    A society ranking high                 Siegel et al.
(EGAL)            in Egalitarianism (EGAL)               (2013)
                  emphasizes equality and
                  selfless commitment to
                  promoting the welfare
                  of others. Members
                  of a highly Egalitarianism
                  society are more likely
                  to treat each other
                  as moral equals. Conversely,
                  a highly Hierarchical
                  culture legitimizes the
                  unequal distribution of
                  authority and stresses
                  strict observation of
                  role obligations. Members
                  of a Hierarchical society are
                  more likely to defer to
                  those of a higher social
                  status and are more willing
                  to concede that power
                  may be used to
                  pursue personal interests.
Harmony (HARM)    Harmony/Mastery concerns a             Siegel et al.
                  society's views regarding the          (2013)
                  relation of mankind to the
                  natural and social world.
                  Harmony refers to a societal
                  perspective that accepts the
                  world as it is (as opposed to
                  trying to control or "master"
                  it). Harmony emphasizes
                  comprehension, rather than
                  domination or exploitation.
                  Mastery reflects a society's
                  preference for active
                  determination of one's destiny,
                  ambitious self-assertion, and
                  rigorous efforts to "get
                  ahead" and to control (i.e.,
                  "master") the natural or social
                  environment.
Embeddedness      A society that Schwartz                Siegel et al.
(EMBED)           (2006) scores as high in               (2013)
                  terms of Embeddedness (EMBED)
                  emphasizes the maintenance of
                  the status quo, the protection
                  of group solidarity, and the
                  cultivation of favorable
                  relationships within the group
                   and within the broader society.
                  Alternatively, in a highly
                  Autonomous society, individuals
                  are perceived as independent
                  actors, and each person is
                  considered a bounded entity
                  who is free to pursue
                  independent interests.
Trust             A measure of a country's               Aghion et al.
                  generalized level of trust             (2010)
                  is based on the responses
                  to the World Values Survey
                  question: "Generally speaking,
                  would you say that most
                  people can be trusted or that you
                  can't be too careful in dealing
                  with people?" Higher values
                  indicate a lower overall level of
                  trust.
Potential
Instruments
Individualism     Measure of genetic distance based      Spolaore and
FST-US            on estimated differences in            Wacziarg
                  alleles (i.e., the specific form       (2009)
                  taken by a gene) between the
                  population of a given country
                  and the US population.
                  United States ranks highest in
                  Individualism. Higher values
                  of FST-US indicate greater
                  genetic difference between the
                  two countries.
S-Allele          Country-level measure of genetic       Chiao and
                  variation in the serotonin             Blizinsky
                  transporter gene (SLC6A4). The         (2010)
                  statistic is a measure of
                  the prevalence of the S-Allele
                  in the polymorphism 5-HTTLPR
                  of the serotonin transporter gene
                  SLC6A4. Higher values suggest
                  greater sensitivity to
                  depression-inducing
                  effects of social stress.
G-Allele          Country-level measure of               Way and
                  genetic variation in a [mu]-opioid     Lieberman
                  receptor. The statistic is a measure   (2010)
                  of the prevalence of a
                  functional polymorphism (A118G)
                  in the [mu]-opioid
                  receptor gene. Higher values suggest
                  greater sensitivity to
                  social reiection.
Pathogen          Country-level measure of the           Fincher et al.
                  relative presence of pathogens         (2008)
                  in the local ecology. The
                  measure is based on historical
                  epidemiological data regarding
                  nine specific pathogens
                  detrimental to human health.
Variable Name     Definition                             Source
Frost             Indicator variable that equals 1       Parker (1997)
                  if frost is likely to occur, and 0
                  if not.
Pronoun           Indicator variable that equals 1       Kashima and
                  if the nation's prominent              Kashima
                  language allows the omission           (1998)
                  of first-person singular
                  pronouns in an independent
                  clause, and 0 if not.
Uncertainty
Avoidance
Protestant        Percentage of a nation's population    Guiso et al.
                  following a Protestant religion.       (2003); CIA
                                                         World Factbook
Hierarchical      Percentage of a nation's population    Guiso et al.
                  following Hierarchical                 (2003); CIA
                  religions. Religions classified        World Factbook
                  as Hierarchical are:
                  Catholic, Muslim, Orthodox.
2P Pron           Indicator variable that equals 1       Kashima and
                  if the nation's prominent              Kashima
                  language requires the speaker          (1998)
                  to select from multiple
                  second-person pronouns (to
                  differentiate degrees of
                  familiarity and/or respect).
Power Distance
CommHist          Indicator variable that equals 1       Parker(1997)
                  if the nation's government is
                  communist or has been
                  communist, and 0 if not.
Latin Col         Indicator variable of 1 if country     Hensel (2009)
                  was colonized by Spain,
                  Portugal, or France (i.e.,
                  country with Latin-based
                  language), 0 if not.
Masculinity
TempAva           Country's 30-year average              Parker (1997)
                  temperature (in Celsius).
FST-Japan         Measure of genetic distance            Spolaore and
                  based on estimated differences in      Wacziarg
                  alleles (i.e., the specific form       (2009)
                  taken by a gene) between the
                  population of a given country
                  and the population of Japan.
                  Japan ranks highest in
                  Masculinity. Higher values of
                  FST-Japan indicate greater
                  genetic difference between the
                  two countries.
Egalitarianism
ELF               Country-level measure reflecting       La Porta et al.
                  the probability that two               (1999)
                  randomly-determined individuals
                  in a particular country
                  are not members of the same
                  ethnolinguistic group. Higher
                  values indicate greater
                  ethnolinguistic diversity.
Lang-Frac         Country-level measure of               Alesina et al.
                  linguistic fractionalization. Higher   (2003)
                  values indicate greater linguistic
                  diversity.
CommHist          Indicator variable that equals 1 if    Parker (1997)
                  the nation's government is
                  communist or has been
                  communist, and 0 if not.
Harmony
Brit Col          Indicator variable that equals 1       Hensel (2009)
                  if country was colonized by
                  Britain, and 0 if not.
Eng-Frac          Percentage of a nation's population    Hall and Jones
                  speaking English as the                (1999)
                  predominant language.
Embeddedness
Latitude          Country-level measure of               Hall and Jones
                  distance to the equator (based on      (1999)
                  the country's latitude).
Variable Name     Definition                             Source
Pronoun           Indicator variable that equals 1       Kashima and
                  if the nation's prominent              Kashima
                  language allows the omission           (1998)
                  of first-person singular
                  pronouns in an independent
                  clause, and 0 if not.
Pathogen          Country-level measure of the            Fincher et al.
                  relative presence of pathogens         (2008)
                  in the local ecology. The
                  measure is based on historical
                  epidemiological data regarding
                  nine specific pathogens
                  detrimental to human health.
Trust
Protestant        Percentage of a nation's population    Guiso et al.
                  following a Protestant religion.       (2003); CIA
                                                         World Factbook
Hierarchical      Percentage of a nation's population    Guiso et al.
                  following Hierarchical                 (2003); CIA
                  religions (Catholic, Muslim,           World Factbook
                  Orthodox).
Catholic          Percentage of a nation's population    Guiso et al.
                  following a Catholic                   (2003); CIA
                  religion.       World Factbook


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Supporting Information

Additional supporting information may be found online in the Supporting Information section at the end of the article.

Online Appendix S1. Measures of National Culture

Online Appendix S2. Multiple Comparisons Problems Tests

Online Appendix S3. IV Data August 2018

Robert Nash and Ajay Patel (*)

We thank Rachel Pownall, and participants at the 2017 Financial Management Association (FMA) Asia/Pacific Meeting, the 2017 FMA Europe Meeting, and the 2017 FMA Annual Meeting. We also thank Raghu Ran (Editor) and an anonymous referee for their very helpful comments.

(*) Robert Nash is the Thomas K. Hearn Jr. Professor of Finance in the School of Business at Wake Forest University in Winston-Salem, NC. Ajay Patel is a Professor and the Thomas S. Goho Chair in Finance in the School of Business at Wake Forest University in Winston-Salem, NC.

(1) For the instrument to be "relevant," the coefficient on the instrumental variable in the first-stage regression must be statistically significant. The weakness of instruments may be tested using the F-statistic of Cragg and Donald (1993) and the rk Wald statistic of Kleibergen and Paap (2006). Stock and Yogo (2005) provide rules of thumb regarding the use of these metrics. We recommend that the researcher investigate Stata for supplemental information regarding tests of the relevance restriction.

(2) Comparing his cultural dimensions with those of Hofstede, Schwartz (2004) notes that the measures of Embeddedness/Autonomy and Individualism/Collectivism overlap conceptually, especially because both focus on the relation between the individual and the collective. Although there are differences in the Schwartz and Hofstede dimensions, both the Individualism/Collectivism and the Embeddedness/Autonomy statistics broadly consider an autonomous versus an interdependent perspective of society. Also, El Ghoul and Zheng (2016, p. 48) underscore the strong similarities between the Hofstede measure of Individualism/Collectivism and the Schwartz measure of Embeddedness/Autonomy by substituting Individualism/Collectivism for Embeddedness/Autonomy during robustness testing.

(3) Although recognizing that there are differences. Schwartz (2004) discusses the conceptual similarities between his Egalitarianism/Hierarchy measure and Hofstede's Power Distance index. Both are predicated on measuring the extent to which a society legitimizes social inequality. Providing further evidence of the similarities between Egalitarianism/Hierarchy and Power Distance, Carl. Gupta, and Javidan (2004) observe, "Schwartz argued that involuntary dependence on roles, enforced through some kind of authority, is at the essence of hierarchical power distance, whereas cooperative and voluntary negotiation characterizes low power distance and egalitarianism" (p. 532).

(4) A concern when conducting a large number of statistical tests is that some results may register a significant p-value entirely by chance (i.e., the multiple comparisons problem). To mitigate the possibility of such potential "false positives," McDonald (2014) suggests implementing the Bonferroni correction (Dunn, 1961). The Bonferroni correction resets the critical value as the family-wide error rate divided by the number of tests. We confirm the robustness of our results by implementing the Bonferroni correction, as well as the Hochberg (1988) and Holm-Bonferroni (Holm, 1979) procedures. We present the results from these tests in the Appendix S2. Of the correlation coefficients that are statistically significant under the initial tests of significance (see Tables I-VIII later), over 95% are significant under the more restrictive tests.

(5) We recognize that history of communist rule has been identified as a potential instrument for both the Hofstede measure of Power Distance and the Schwartz measure of Egalitarianism/Hierarchy. However, the conceptual similarities between the two metrics (see Section II.B) should support the use of similar instruments.
Table I. Instrumental Variables for Individualism

This table presents data used in our analysis of potential instruments
for the cultural measure of Individualism (IDV). Pronoun is an
indicator variable that equals 1 if the nation's most prominent
language allows the omission of first-person singular pronouns.
Pathogen is a country-level measure of the relative presence of
pathogens based on historical epidemiological data. S-Allele is a
country-level measure of the prevalence of the S-Allele in the
serotonin transporter gene SLC6A4. G-Allele is a country-level measure
of the prevalence of a functional polymorphism (A118G) in the
[mu]-opioid receptor gene. Frost is an indicator variable that equals 1
if frost is likely to occur in a particular country. FST-US is the
estimated genetic distance between the population of a given country
and the US population. Column 1 documents each instrument's correlation
with IDV. Column 2 provides the p-value of the correlation coefficient.
Column 3 presents the number of observations. Column 4 reports the
proportional coverage of the specific variable within our sample.

Variable   IDV       p-Value   n    % Available

Pronoun    -0.8198   0.0000    41    97.6%
Pathogen   -0.7127   0.0000    42   100.0%
S-Allele   -0.7042   0.0000    27    64.3%
G-Allele   -0.7293   0.0001    23    54.8%
Frost      -0.5763   0.0001    42   100.0%
FST-US     -0.5686   0.0001    41   100.0%

Table II. Instrumental Variables for Uncertainty Avoidance

This table presents data used in our analysis of potential instruments
for the cultural measure of Uncertainty Avoidance (UAI). Protestant is
a measure of the percentage of a nation's population following a
Protestant religion. 2P Pron is an indicator variable that equals 1 if
the nation's language requires the speaker to select from multiple
second-person pronouns. Hierarchical measures the percentage of a
nation's population following Hierarchical religions (Catholic, Muslim,
and Orthodox). Column 1 documents each instrument's correlation with
UAI. Column 2 provides the p-value of the correlation coefficient.
Column 3 presents the number of observations. Column 4 reports the
proportional coverage of the specific variable within our sample.

Variable       UAI       p-Value   n    % Available

Protestant     -0.5455   0.0003    40   95.2%
2P Pron         0.4902   0.0011    41   97.6%
Hierarchical    0.4801   0.0017    40   95.2%

Table III. Instrumental Variables for Power Distance

This table presents data used in our analysis of potential instruments
for the cultural measure of Power Distance (PDI). Latin Col is an
indicator variable that equals 1 if the country was colonized by Spain,
Portugal, or France. CommHist is an indicator variable that equals 1 if
the nation's government is, or has been, communist. Column 1 documents
each instrument's correlation with PDI. Column 2 provides the p-value
of the correlation coefficient. Column 3 presents the number of
observations. Column 4 reports the proportional coverage of the
specific variable within our sample.

Variable    PDI      p-Value   n    % Available

Latin Col   0.3940   0.0098    42   100.0%
CommHist    0.3599   0.0192    42   100.0%

Table IV. Instrumental Variables for Masculinity

This table presents data used in our analysis of potential instruments
for the cultural measure of Masculinity (MAS). TempAvg is the country's
30-year average temperature. FST-Japan is the estimated genetic
distance between the population of a given country and the population
of Japan. Column 1 documents each instrument's correlation with MAS.
Column 2 provides the p-value of the correlation coefficient. Column 3
presents the number of observations. Column 4 reports the proportional
coverage of the specific variable within our sample.

Variable    MAS      p-Value   n    % Available

TempAvg     0.2157   0.1702    42   100.0%
FST-Japan   0.1370   0.3929    41   100.0%

Table V. Instrumental Variables for Egalitarianism

This table presents data used in our analysis of potential instruments
for the cultural measure of Egalitarianism (EGAL). ELF is a
country-level variable reflecting the probability that two randomly
selected individuals in a specific country are not from the same
ethnolinguistic group. CommHist is an indicator variable that equals 1
if the nation's government is, or has been, communist. Lang-Frac is a
country-level measure of linguistic fractionalization. Column 1
documents each instrument's correlation with EGAL. Column 2 provides
the p-value of the correlation coefficient. Column 3 presents the
number of observations. Column 4 reports the proportional coverage of
the specific variable within our sample.

Variable    EGAL      p-Value   n    % Available

ELF         -0.4513   0.0051    37    97.4%
CommHist    -0.3958   0.0139    38   100.0%
Lang-Frac   -0.3315   0.0421    38   100.0%

Table VI. Instrumental Variables for Harmony

This table presents data used in our analysis of potential instruments
for the cultural measure of Harmony (HARM). Brit Col is an indicator
variable that equals 1 if the country was colonized by Britain.
Eng-Frac is a measure of the percentage of a nation's population
speaking English as the predominant language. Column 1 documents each
instrument's correlation with HARM. Column 2 provides the p-value of
the correlation coefficient. Column 3 presents the number of
observations. Column 4 reports the proportional coverage of the
specific variable within our sample.

Variable   HARM      p-Value   n    % Available

Brit Col   -0.3731   0.0211    38   100.0%
Eng-Frac   -0.2934   0.0738    38   100.0%

Table VII. Instrumental Variables for Embeddedness

This table presents data used in our analysis of potential instruments
for the cultural measure of Embeddedness (EMBED). Latitude is a
country-level measure of distance to the equator (based on latitude).
Pronoun is an indicator variable that equals 1 if the nation's most
prominent language allows the omission of first-person singular
pronouns. Pathogen is a country-level measure of the relative presence
of pathogens based on historical epidemiological data. Column 1
documents each instrument's correlation with EMBED. Column 2 provides
the p-value of the correlation coefficient. Column 3 presents the
number of observations. Column 4 reports the proportional coverage of
the specific variable within our sample.

Variable   EMBED     p-Value   n    % Available

Latitude   -0.6831   0.0000    38   100.0%
Pronoun     0.6560   0.0000    38   100.0%
Pathogen    0.5739   0.0002    38   100.0%

Table VIII. Instrumental Variables for Trust

This table presents data used in our analysis of potential instruments
for the cultural measure of Trust. Higher values of this variable
indicate lower levels of trust. Protestant is a measure of the
percentage of a nation's population following a Protestant religion.
Hierarchical is a measure of the percentage of a nation's population
following Hierarchical religions (Catholic, Muslim, and Orthodox).
Catholic is a measure of the percentage of a nation's population
following the Catholic religion. Column 1 documents each instrument's
correlation with Trust. Column 2 provides the p-value of the
correlation coefficient. Column 3 presents the number of observations.
Column 4 reports the proportional coverage of the specific variable
within our sample.

Variable       Trust     p-Value   n    % Available

Protestant     -0.6096   0.0001    37   100.0%
Hierarchical    0.5728   0.0002    37   100.0%
Catholic        0.5185   0.0010    37   100.0%

Table IX. Papers, Instruments Used, and Outcomes Studied

Column 1 of this table documents the studies that use the specific
instrumental variables. The second column identifies the measure of
national culture (i.e., the potentially endogenous variable). The third
column lists the specific instrument used in each study. The fourth
column presents the study's outcome variable. The Appendix provides
definitions and data sources.

Paper                         Measure of              Instrument
                              National Culture

Griffin et al. (2018)         Individualism (IDV)     FST-US
Bryan et al. (2015)           Individualism (IDV)     FST-US
Eunet al. (2015)              Individualism (IDV)     FST-US
Gorodnichenko and             Individualism (IDV)     FST-US
Roland (2011a)
Gorodnichenko and Roland      Individualism (IDV)     FST-US
(2011b)
Gorodnichenko and Roland      Individualism (IDV)     FST-US
(2017)
Boubakri et al. (2016)        Individualism (IDV)     FST-US
Zheng, El Ghoul,  Guedhami,   Individualism (IDV)     FST-US
and Kwok (2013)
Liang et al. (2013)           Individualism (IDV)     FST-US
Boubakri and Saffar (2016)    Individualism (IDV)     FST-US
Gorodnichenko and Roland      Individualism (IDV)     S-Allele
(2011b)
Gorodnichenko and             Individualism (IDV)     S-Allele
Roland (2017)
Gorodnichenko and             Individualism (IDV)     G-Allele
Roland (2011b)
Boubakri and                  Individualism (IDV)     Pathogen
Saffar (2016)
Boubakri et al. (2016)        Individualism (IDV)     Pathogen
Zheng et al. (2013)           Individualism (IDV)     Pathogen
Gorodnichenko and             Individualism (IDV)     Pathogen
Roland (2011b)
Gorodnichenko and             Individualism (IDV)     Pathogen
Roland (2017)
Griffin et al. (2017)         Individualism (IDV)     Pronoun
Griffin et al. (2018)         Individualism (IDV)     Pronoun
El Ghoul and Zheng            Individualism (IDV)     Pronoun
(2016)
Gorodnichenko and             Individualism (IDV)     Pronoun
Roland (2011b)
Gorodnichenko and             Individualism (IDV)     Pronoun
Roland (2017)
Liang et al. (2013)           Individualism (IDV)     Pronoun
Li, Griffin, Yue,             Uncertainty Avoidance   Religion
and Zhao (2013)               (UAI)
Kwok and                      Uncertainty Avoidance   Religion
Tadesse (2006)                (UAI)
El Ghoul and                  Uncertainty Avoidance   Religion
Zheng (2016)                  (UAI)
Griffin et al.                Uncertainty Avoidance   2P Pron
(2017)                        (UAI)
Griffin et al.                Uncertainty Avoidance   2P Pron
(2018)                        (UAI)
El Ghoul and                  Masculinity (MAS)       FST-Japan
Zheng (2016)
Siegel et al.                 Egalitarianism (EGAL)   Fractionalization
(2013)
Siegel et al.                 Egalitarianism (EGAL)   Fractionalization
(2011)
El Ghoul et                   Egalitarianism (EGAL)   Fractionalization
al. (2016)
Siegel et al. (2013)          Egalitarianism (EGAL)   CommHist
Breuer and Salzmann           Harmony (HARM)          Brit Col
(2012)
Licht et al. (2007)           Harmony (HARM)          Brit Col
Licht et al. (2005)           Harmony (HARM)          Brit Col
El Ghoul et al. (2016)        Embeddedness (EMBED)    Latitude
Chui et al.  (2016)           Embeddedness (EMBED)    Pathogen
Chui et al. (2016)            Embeddedness (EMBED)    Pronoun
Breuer and                    Embeddedness (EMBED)    Pronoun
Salzmann (2012)
Licht et al. (2007)           Embeddedness (EMBED)    Pronoun
Guiso et al.  (2006)          Trust                   Religion
Guiso et al. (2009)           Trust                   Religion

Paper                                 Outcome

Griffin et al. (2018)                 Corporate governance
Bryan et al. (2015)                   Executive compensation
Eunet al. (2015)                      Stock price synchronicity
Gorodnichenko and  Roland (2011a)     Output per capita
Gorodnichenko and Roland (2011b)      Innovation and long-term growth
Gorodnichenko and Roland (2017)       Innovation and long-term growth
Boubakri et al. (2016)                Level of state ownership
Zheng, El Ghoul, Guedhami, and Kwok   Corruption in bank lending
(2013)
Liang et al. (2013)                   Corporate investment
Boubakri and Saffar  (2016)           External financing
Gorodnichenko and  Roland (2011b)     Innovation and long-term growth
Gorodnichenko and Roland (2017)       Innovation and long-term growth
Gorodnichenko and  Roland (2011b)     Innovation and long-term growth
Boubakri and  Saffar (2016)           External financing
Boubakri et al. (2016)                Level of state ownership
Zheng et al. (2013)                   Corruption in bank lending
Gorodnichenko and Roland (2011b)      Innovation and long-term growth
Gorodnichenko and Roland (2017)       Innovation and long-term growth
Griffin et al. (2017)                 Corporate governance
Griffin et al. (2018)                 Corporate governance
El Ghoul and Zheng (2016)             Trade credit provision
Gorodnichenko and Roland (2011b)      Innovation and long-term growth
Gorodnichenko and  Roland (2017)      Innovation and long-term growth
Liang et al. (2013)                   Corporate investment
Li, Griffin, Yue, and Zhao            Corporate risk taking
(2013)
Kwok and  Tadesse (2006)              Configuration of financial system
El Ghoul and Zheng (2016)             Trade credit provision
Griffin et al. (2017)                 Corporate governance
Griffin et al. (2018)                 Corporate governance
El Ghoul and Zheng (2016)             Trade credit provision
Siegel et al. (2013)                  Foreign direct investment
Siegel et al. (2011)                  International investment flows
El Ghoul et al. (2016)                Profit reinvestment
Siegel et al. (2013)                  Foreign direct investment
Breuer and  Salzmann                  Corporate governance
(2012)
Licht et al. (2007)                   Governance norms
Licht et al. (2005)                   Investor legal rights
El Ghoul et al. (2016)                Profit reinvestment
Chui et al. (2016)                    Cost of debt
Chui et al. (2016)                    Cost of debt
Breuer and Salzmann (2012)            Corporate governance
Licht et al. (2007)                   Governance norms
Guiso et al. (2006)                   Attitudes regarding
                                      entrepreneurship, savings,
                                      and redistribution
Guiso et al. (2009)                   Economic exchange between
                                      countries
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Author:Nash, Robert; Patel, Ajay
Publication:Financial Management
Article Type:Report
Geographic Code:1USA
Date:Jun 22, 2019
Words:15108
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