The impact of confucian culture on the cost of equity capital: The moderating role of marketization process

Huan Tan and Zhi Wang

International Review of Economics & Finance, 2023, vol. 86, issue C, 112-126

Abstract: The cost of equity capital (COEC) is a crucial component of investment decisions and corporate performance evaluations. In the process of corporate financing, an inadequate formal system may lead to the phenomenon of “Bad money drives out good”. While Confucian culture can compensate for the deficiency of the formal system by influencing the value orientation of the actors. Therefore, this paper examines the impact of Confucian culture on firms’ cost of equity capital (COEC) from an informal institutional perspective. Our study presents robust findings that firms headquartered in areas with strong Confucian culture have lower costs of equity capital, and the marketization process has a moderating effect on the relationship between Confucian culture and the COEC. The impact of Confucian culture on the COEC of firms is mainly achieved through three ways: reducing information risk, reducing business risk and mitigating agency problems. Further, foreign cultural shocks will weaken the relationship between Confucian culture and the COEC. These results remain robust after controlling for the endogeneity problem. This study indicates that Confucian culture, as an invisible complementary governance mechanism of the formal system, plays an important and positive role in “reducing the COEC”.

Keywords: Confucian culture; Cost of equity capital; Informal system; Information risk; Business risk; Agency problems (search for similar items in EconPapers)
JEL-codes: G39 G41 M40 O53 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:86:y:2023:i:c:p:112-126

DOI: 10.1016/j.iref.2023.03.010

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