Cultural Finance

by
Wolfgang Breuer* and Benjamin Quinten**

01 July 2009

Original draft: October 2008

Prof. Dr. Wolfgang Breuer, Chair of Business Administration and Finance, RWTH Univer-

sity, Templergraben 64, 52056 Aachen, Germany. Tel.: +49 241 8093539, Email: wolfgang.breuer@bfw.rwth-aachen.de.
**

Dipl.-Kfm. Benjamin Quinten, Chair of Business Administration and Finance, RWTH Uni-

versity, Templergraben 64, 52056 Aachen, Germany. Tel: +49 241 8093670, Email: benjamin.quinten@bfw.rwth-aachen.de

Financial support from the Deutsche Forschungsgemeinschaft (German Research Foundation) is gratefully acknowledged.

Electronic copy available at: http://ssrn.com/abstract=1282068

Cultural Finance

Abstract: Against the backdrop of a Europe that is continuing to grow together economically,
and in times of striking globalization, an emphasis on culture as an explanatory determinant in
the context of economic issues would seem particularly attractive. This study intends to pursue this line of thought and to proclaim a new, autonomous discipline: Cultural Finance. This
discipline aims to integrate cultural aspects into the analysis of financial questions. To this
end, the importance of cultural values in financial decision-making is demonstrated on the
basis of methods taken from game theory and institutional economics. Additionally, existing
weak points in this research field are uncovered by a systematic overview of the current literature, and some future developments are indicated. Finally, this study shows that Cultural Finance can close the literature gap between the neighbouring disciplines of Law and Finance
and Behavioural Finance.
Keywords: national culture, cultural value, finance, institutional economics

JEL-Classification: A13, G30, N20, Z13

Electronic copy available at: http://ssrn.com/abstract=1282068

1. Introduction
Nowadays, a fundamental phenomenon is the growing interdependence between countries,
peoples and cultures of the world, which is developing in very different sectors (such as economics, politics, media, science and education) and is commonly described as globalization.
Regarding the consequences of this process, two core theses can be found in the literature:
First, the so-called theory of convergence1 asserts that the process of globalization has led to
homogenization at many levels in terms of a transnational standardization, and that this will
continue in the future. According to this theory, via the globalization process the economic
environment will be extensively harmonized, so that people, too, will converge in both their
attitudes and behaviour at many levels. Second, in complete contrast, there is the theory of
divergence2, according to which there are many areas of social life which have displayed regional differences over a long time period and which continue to exist now or have even
grown in intensity owing to the pressure of globalization. Huntingtons (1994) controversially
debated forecast of the Clash of Civilizations may be mentioned here as an example if
rather an extreme one.
Consistent with the basic concept of the theory of divergence, empirical observations suggest
that many financial issues differ strongly according to country and region, even though there
is a tightly interdependent globalized capital market, whose existence and influence is continually being emphasized. As an example, one may think in this context of the different characteristics of national financial systems or the diverging relative significance of debt and equity financing. These empirically relevant differences in financial practice continue to throw
up hitherto unanswered questions for the predominant neoclassical finance models as well as
for the information economics approaches, which are also based on neoclassical ideas. However, an interesting starting point for explaining these differences might be offered by a young
field of research that includes cultural aspects in the analysis of financial problems.
It is the intention of this paper to describe the scientific relevance, areas of research, and future development potentials of Cultural Finance, covering all aspects of traditional Finance,
such as Portfolio Management or Corporate Finance. To this end, key terms used in the cultural sciences, and which are important for financial analysis, will be determined in Section 2.
Section 3 deals with the economic relevance of cultural factors. Section 4 attempts to survey
the literature published so far, which considers culture in the field of Business Studies and,

1
2

Cf. Hasenstab (1999) and Scholz (2000).

Cf. again Hasenstab (1999) and Scholz (2000).

particularly, in Finance research. Section 5 follows up with the positioning and definition in
the literature of an autonomous research field termed Cultural Finance. Concluding in Section 6, the previous achievements of the presented literature are evaluated in order to indicate
future research directions which can build on and develop from their weak points.

2. Culture, Values and Behaviour

Culture generally is a highly complex, vague term, which depending on the scientific discipline and scientific objective , has different connotations. Already in the 1960s, the American anthropologists Kroeber and Kluckhohn elaborated a systematic overview of over 160
different definitions of culture.3 In another definition, the term culture stands for the content and form of expression of the predominant values and mentality of a social group. Consequently, culture involves and shapes moral attitudes, habits and customs, the legal, political
and economic systems as well as language, art, and the social and academic education of the
group concerned.
More recent definitions of culture, particularly in the area of Applied Sociology and Social
Psychology as that of Hofstede (1980) or Schwartz (1999) emphasize the central relevance
of values as a constitutive element of culture, whereby values and the patterns of thinking,
feeling and actions emanating from them, characterize a specific culture. According to this
diction, different cultures can be distinguished on account of their respective value systems.
Values in the same way as culture a multifaceted term should in this context not be
taken in the (familiar) economic sense, but rather in the sociological sense of value orientations. Thus, a value reflects a notional perception of what a group considers to be good or
bad, normal or abnormal, ethical or unethical.4 The Israeli social psychologist Shalom
Schwartz derives seven formal attributes of values on the basis of previous work by, for example, Kluckhohn (1951) and Rockeach (1973):5
intrinsically motivated: derived from motivational core goals,
ideal: belonging as convictions to desirable finite states or behaviours (ideals),
unspecific: superordinate to specific situations,
stable: changing very slowly (over a period of more than 30 years),

Cf. Kroeber/Kluckhohn (1952).

Cf. Hofstede (2001) for a similar concept.
5
Cf.,e.g., Schwartz (1992)
4

orderable: can be ordered by their relative importance,

attitude-steering: influencing of attitudes via the relative significance and hierarchical
ordering of values,
behaviour-shaping: determining as standards the selection and evaluation of events
and behaviour.
According to the above interpretation, values are separate from attitudes and behaviour.
Compared to attitudes, values are more abstract and general. Thus, the same value can apply in different situations, whereas attitudes are associated with specific situations. Furthermore, attitudes cannot be ordered by their importance a value attribute which holds a
strong position in the Schwartz definition above.
Values as well as attitudes with their described attributes belong to the so-called concept
level of culture, which contains the empirically non-observable mental processes (cognitions).
In the terminology of Osgood (1951), they become visible at the percepta level of culture,
which involves all the perceivable, empirically measurable components of culture, such as
specific behaviours or physical objects.
To order the interaction of these forces within a cultural framework, a hierarchical impact
chain can be compiled, which ranges from values over attitudes to behaviour and can be confirmed by empirical studies, such as those by Homer and Kahle (1988).6 Values are the cultural core, and, as such, determine attitudes, which on their part steer behaviour. For instance,
one culture may think highly of the value environmental protection, whereas the value system of another culture may subordinate this particular value. In this respect, one culture might
judge the other to be an environmental sinner in a specific situation and criticize its government for weakness in protecting the natural environment. While the perception of these
other circumstances may be associated with an attitudinal deficiency, the criticism represents
the behavioural level.
Figure 1 visualizes an impact chain, by which a derivation of attitudes from a value and of
behaviour from attitudes is possible, so that (per se) invisible values become visible in a specific behaviour, and thus empirically concrete. This view reflects the so-called duality principle of cultural research, which postulates an explicit consideration of cultural parameters and
practiced behaviour.7 The embeddedness of the impact chain within a cultural framework is
intended to clarify specifically this relation: a culture evolves from the values, attitudes and

6
7

Cf. also Adler (1997) or Bardi/Schwartz (2003).

Cf. Scholz (2000).

behaviour of its members and is therefore an output factor on the one hand. On the other hand,
culture impacts on these factors as a framework concept in the sense of a collective programming of the mind8 and influences as an input factor behavioural patterns, so that an (indirect) relationship between culture and behaviour can be established.
<<< Insert Figure 1 about here >>>
For the context of this paper, culture can be defined as follows:9
Culture may be understood as a complex entity of cognitions, shared by the members
of a social group. The focal point of the cognitions is (core) values, which are assumed
to steer individual behaviour.
In line with the above perception, a possibility arises for empirically capturing the construct of
culture, which has always been so difficult to measure. A method for implementing this and
quantitatively measuring cultural aspects is offered by the so-called culture models, which
different researchers have developed in various forms on the basis of sociological, psychological and anthropological fundamentals. Usually, culture models consist basically of several
(cultural) dimensions, which serve to characterize and classify cultures. These cultural dimensions are usually bipolar, and designed with two extremes, enabling cultures to be grouped
along corresponding scales.
Table 1, which demonstrates the long tradition and popularity which culture models have in
science, includes the most important of these:
<<< Insert Table 1 about here >>>
Hofstedes culture model with its later extensions10 is generally considered to be the most
popular approach for describing cultural conditions and therefore finds wide application in
research and practice.11 However, recently, the culture model of Schwartz (1992, 1994) has
gained in popularity because it can overcome several methodological weaknesses inherent in
Hofstedes model, which have become apparent over time.12 What both models have in common is that the cultural impact chain described above is regarded as given.13 The respective

Cf. Hofstede (1980), p. 13.

Cf., for a similar definition, Bilsky/Jehn (2002).
10
Cf., e.g., Hofstede (2001).
11
Kirkman/Lowe/Gibson (2006) give, for example, a survey of over 180 studies using Hofstedes culture model.
12
Cf., e.g., Ng/Lee/Soutar (2007).
13
This is certainly not an attribute of all culture models. Other models, such as Halls (1976) or Trompenaars
(1993), are not primarily based on values as the core of culture. Cf. Kutschker/Schmid (2004).
9

value systems serve to characterize and distinguish attributes of the culture under consideration and are therefore central components and the primary scientific objective of both culture
models. In particular, the Schwartz model is often referred to as value theory.14
Schwartz (1994, 1999) implemented his studies between 1998 and 2005. These were preceded
by an extensive, theoretical development of a basic cultural values concept. Samples from 93
ethnic groups in 73 countries were collected. Schwartz determined the following 7 universal
value types, or cultural dimensions, which can be operationalized by 45 basic values and
which span the Schwartz culture model as constitutive pillars:15
Conservatism refers to the preservation of existing orders and traditions. Close social
relationships and identification with the community place the pursuit of collective interests at the focal point of a persons life. The basic values especially connected with
this value type are: maintenance of the status quo, respect for tradition, family and national security, wisdom, adaptation.
Autonomy describes to what extent personal interests and desires are pursued in the
community. The self-reference of the individual is predominant. Due to the comparatively high heterogeneity of the basic values in this value type, the latter can be split
up further to gain a more precise description:
Intellectual Autonomy strengthens the pursuit of individual ideas and individual ways of thinking, and encourages intellectual independence. Supporting
basic values are: curiosity, creativity and broadmindedness.
Affective Autonomy on the other hand focuses on the significance of an individual seeking to express his or her feelings in order to have a fulfilled life.
Underlying basic values are: enjoyment and an exciting and varied life.
Hierarchy demonstrates the degree of the acceptance of the hierarchical structure of a
society and the resulting allocation of roles and resources. The question of the legitimization of unequal power distribution is a central feature. Among other things, important basic values are: social power, authority, humility and wealth.
Mastery emphasizes the active mastership of the social environment by use of selfassertion. An active and committed meeting of aims and challenges is aspired to via
basic values such as ambition, success, daring and competence.

14

Cf., e.g. Mohler/Wrohn (2005).

The basic values mentioned below present merely a selection of all basic values covered by a particular value
type.

15

Egalitarianism describes the desire to help others as well as voluntary commitment to

supporting the public welfare. In such cultures, individuals are considered morally
equal. Basic values such as equality, social justice, freedom, responsibility and honesty operationalize this value type.
Harmony promotes the harmonization with the natural environment, namely the individual should harmoniously fit into the natural and social world. Basic values are:
unity with nature, protection of the environment and focus on the beauty of the world.
The extensive surveying of different subjects with regard to the significance of the individual
value types as Guiding Principles in His/Her Life has led to the conclusion that certain cultural groups exist, which attach similar importance to different basic values and hence to different value categories. Primarily, eight transnational cultural zones can be distinguished,
which are characterized by a certain geographical proximity, so that one may speak of cultural regions. This could be the result of a common history, language or religion, which facilitated a cross-border mixture of cultural values, or vice versa. These cultural zones are:
Western Europe, Eastern Europe, the Anglo-Saxon countries, Arabia, the Confucian countries, South Asia, Africa, and Latin America.16
To summarize this observation of cultural aspects and their practical significance in individual
countries, it can be stated that transnational cultural zones exist, which are characterized by
high homogeneity with regard to the value systems of their group members. Compared to
other cultural zones, there are substantial divergences so that one can legitimately speak of
culture-specific differences.

3. Economic Logic of Cultural Values

In order to explore in which way cultural values can have an impact in an economic context,
we may consider the prisoners dilemma, which is well-known from game theory. In this
situation, there are two suspects in solitary confinement with no opportunity of communicating with each other. The prosecution is sure that they have committed a serious crime together, but there is insufficient evidence to convict them. In the separate interrogations, each
suspect has two possibilities: to confess or deny the crime. If both deny, the prosecution will
accuse each of them of several minor crimes, such as illegal gun possession, and they will
both get a milder conviction, such as a 2-year prison sentence. If both confess the crime, they

16

Cf., for a similar distribution, Hofstede (1980) or Gupta/Hanges/Dorfman (2002).

will be accused together but they will only receive an 8-year prison sentence, since their confessions will result in extenuating circumstances. If one confesses and the other denies, the
one who confesses will be released after a short period of time, according to the leniency policy, whilst the other will receive the maximum 10-year prison penalty.
In order to illustrate the mechanism of values in this story, three following game situations are
distinguished:
1) The classical prisoners dilemma: If each criminal acts to maximize his/her own
benefit in a rational and context-independent manner like economic man confessing is the obvious dominant strategy for each of them. The optimum, i.e. denial
on both sides, is not achieved, resulting in a welfare loss relating to society as a whole
(here: from the view point of both criminals as one unit).
2) Formal institutional regulation: Again, both suspects act in a purely opportunistic
manner, but have to accept certain institutional regulations in this game situation. In
the prisoners dilemma, for instance, one can think of the Mafia institution Omert,
according to which silence at all costs is to be adhered to, and drastic physical
measures implemented should this not be the case (but also the prospect of welfare in
the case of remaining silent). Both criminals are led to relinquish their dominant strategy and to deny the crime, on account of the arranged incentive and control system.
Consequently, the institutional regulation admittedly acts as a microeconomic restriction; but for society as a whole, the optimum of the game situation can be achieved.
Nevertheless, welfare losses are incurred in the form of transaction costs, caused for
example by the implementation and controlling costs of the institutional regulation. In
the case above, the criminal organization would take sanctions if a suspect were to
confess to the crime (incurring costs). Detached from this specific context, the effectiveness of formal laws can be likewise interpreted.
3) Cultural ties: Here, the validity of culturally based values is postulated. Invoking
Schwartzs culture model, a high importance attached to the value egalitarianism
within a society (in this case: for both crooks) could ensure that neither of them acts
opportunistically during interrogation, but in a more altruistic manner. In order to
avoid harming the accomplice, both deny the crime and get away with a 2-year sentence each.
As in 2), the macro-level optimum is achieved in this version of the game, but with
the difference that this value-oriented behaviour does not incur transaction costs in the

form of, for instance, implementation and controlling costs, such as in the case of formal institutional regulation.
Doubtlessly it could be argued here that free rider problems could offset the transaction costs: Each single individual might regard cultural aspects, similarly to a formal
institutional regulation, as a restriction on his or her decision-making freedom. Thus,
the incentive might arise to trust in the value-oriented behaviour of the other but to act
contrarily oneself. In this case, a suspect admitting his or her guilt and an accomplice
who remains unwavering, could get away with a one-year sentence. However, this argument may be weakened by the intrinsically motivated creation of values: behaviour
which is consistent with cultural values gains its own intrinsic value for the actor, so
that the welfare increasing consequences of cultural values stem from two sources:
first from a directly perceived benefit via the value-oriented action as an end in itself17,
second, from an indirectly perceived benefit via enhanced coordination possibilities of
all participants behaviour.
An observation of these three game versions of the prisoners dilemma demonstrates the relevance of values for human decision-making: Value-oriented behaviour is the efficient solution
to the game situation in the prisoners dilemma. If such values hold a different significance in
different groups, and thus develop divergent impacts as known from cultural research (see
Section 2), it follows that cultural aspects are relevant for situations involving human decision-making interaction, and thus for economics.
Moreover, all three game situations above can be analyzed by means of cultural value theories, so that it seems appropriate to propose culture models as comprehensive analyzing tools
for economic interactions. For example, observing Schwartzs (1994) culture model, the behavioural patterns of the criminals in each respective game situation can be easily interpreted
on the basis of the different significance of the individual cultural dimensions. In game situation 1, where the behaviour is characterized by unbounded opportunism, those values of
autonomy may be valid, which involve a concentrated pursuit of individual interests. A high
significance of values in the categories conservatism or hierarchy indicates a strong interest of a society in formal institutional regulations, which would explain situation 2. A potential connection between game version 3 and the value category in egalitarianism has already
been mentioned above.

17

For the utility endowing impact of internalized culture, cf., e.g., Weise (2004).

The culture-oriented approach generally demonstrates a connection to ethical and moral issues. Breuer, Quinten and Korte (2008) show, with the help of a similarly constructed prisoners dilemma, that the effect of ethical aspects in the economy operates analogously to that
of cultural values. This is not surprising, considering that ethical aspects, such as morals or
customs, are likewise elements of culture according to the above definition. The essential difference between ethical and cultural values is only that different value systems prevail in different cultures. These systems determine different comprehensions of ethical behaviour. In
this respect, a culture-oriented approach is also more general than business-ethical approaches.
Another possibility to demonstrate the economic relevance and generality of culture is given
by the economic institutions model of Williamson (2000), illustrated in figure 2. Williamson
distinguishes four interdependent levels of analysis, where a higher level functions as a restricting and initializing development frame for the respective following level (continuous
arrows). The dashed arrows symbolize, in contrast, a feedback process from a lower to a nexthigher level, although (as a rule) on account of the very large time horizons of the process,
this can be abstracted from.
Level 1 covers all the informal institutions such as values, religion, traditions or customs that
could be understood as culture in the sense of the definition above and is basically analyzed
by the social sciences.18 According to the relationships between the levels, culture influences
the development of the more specific formal institutions of the second level (constitutional
environment), such as of property rights or law and order, by providing the frame of development. On this basis, governance structures in the form of specific contractual agreements
are determined (level 3), which for their part finally lead to specific incentive alignments for
the individual behaviour (level 4).
<<< Insert Figure 2 about here >>>
Owing to the initializing and restrictive role that culture plays for other areas of economic
analysis, its influence on the amount of incurred transaction costs can again be explained: the
attributes of cultural values presented above as stable, unspecific and shared by a social
group, serve to form relatively homogeneous ideas about the adequate form of the derived
institutions of levels 2 to 4. This means that the transaction costs for development and imple
18

North (1994) distinguishes between informal and formal institutions and similar interdependent relationships
in his well known institutional axiomatic.

10

mentation of these institutions can be kept comparatively low, provided that these do not conflict with level 1.
The thesis that culture can be used as a comprehensive method of analysis for economic interactions is also demonstrated by the Williamson model: Owing to the top-down relations between the individual analysis levels, culture influences other institutional dimensions, such as
formal institutional regulations (level 2 and 3) or (opportunistic) incentive alignments (level
4) and thus enables us to analyze, for instance, perceptions of transaction costs theory (game
version 2 in the prisoners dilemma) or neoclassical economics or information economics
perceptions (game version 1 in the prisoners dilemma).
Summing up, it can be said that the economic relevance of cultural values results on the one
hand from the fact that these values are reflected in the (formal) institutions of a society, such
as in a specific financial system as a consequence of the underlying constitutional environment and the corresponding corporate governance system. On the other hand, cultural factors
having their own intrinsic values, they may exert influence on preferences of individual decision-makers. Thus, culture can influence the economic behaviour of individuals both indirectly via formal institutions of a society, and directly via cultural values as an end in themselves.

4 Review of the Literature on Culture and Economics

4.1 Culture in Economics
When the question is posed about the historical roots of the scientific relationship between
culture and economics, in the broader sense the answer to it may be found back in the age of
Enlightenment with Adam Smith and his opus The Wealth of Nations. In a more restricted
sense however, the sociologist Max Weber is more likely to be seen as the original source of
Cultural Economics with his thesis on The Protestant Ethic and the Spirit of Capitalism in
the early 20th century. In his work, he pursues the development of modern capitalism in Western Europe. Weber finds the cultural factors, to which he allocates a key role, in the dissemination of a Protestant Weltanschauung, which incorporated a particular spirit of capitalism.
Following on in the 20th century, particularly in the period following the Second World War,
the triumph of Neoclassical Economics led to cultural aspects being increasingly left by the
wayside when it came to explaining economic phenomena. In this period of economic impe-

11

rialism, culture was only granted the function of an exogenously given constraint in economic optimization calculations. Jones (1995, p.269) quite rightly speaks of cultural nullity
in this context. Owing to the neoclassical concept of equilibrium and perfect competition,
there was simply no room for the multifarious impacts of cultural factors in such an autonomous economy. Certainly, the methodological difficulties in quantifying culture have contributed to this situation, because it meant that cultural aspects could not be easily transferred
into models.
Roughly since the 1990s, the interest in culture as an explanatory determinant has constantly
been growing on the part of business and economics. The key reason for this may be the limits, which have been experienced by the Neoclassical Economics and Information Economics
models in explaining real behaviour and empirical results. The integration of social science
findings into economics has been and still is claimed to be a solution to this problem. As a
result, in addition to social psychological findings, such as in Behavioural Economics, findings from cultural science have also become interesting for economists. A second reason may
be seen in the development of sophisticated culture models, especially that of Hofstede
(1980). On account of improved empirical measurability of cultural factors, these could not
only be analyzed more precisely, but could be more easily modelled for other sciences, such
as economics. Thus, testable hypotheses were put forward to empirically examine the influence of culture on economics.
Hofstedes work Cultures Consequences in 1980 has probably been the major impulse behind the intensification of the interdisciplinary research between the cultural and economic
sciences, particularly in the domain of Business Studies. Since then, interest in explaining
intentionally diverging phenomena by means of cultural aspects has increased in many areas
related to Business Studies. Table 1 provides a systematizing overview of selected (empirical)
studies.
<<< Insert Table 2 about here >>>
The work of Hofstede (1980) facilitates an explanation of the systematic methodology of the
overview. In his study relating to the area of Strategy Management, he pinpoints cultural aspects by means of his culture model (column 3) and tries to investigate globally (column 4)
their effect on management.19 This enables him to arrive at the central finding (column 2)

19

Global means that more than three of the cultural regions mentioned above are included.

12

that management practices may not be seen as having universal validity, but that, if these are
to be successfully implemented, cultural aspects must be taken into consideration.

4.2 Literature Overview: Culture in Finance

The trend towards considering cultural aspects has also established itself in research in the
domain of Finance. Table 2 attempts to demonstrate the development of Cultural Finance,
as in Table 1, by providing a comprehensive overview of the most important (empirical) studies in chronological order. Except for the very early pioneer work by Stonehill and Stitzel
(1969), significant works in the domain of Cultural Finance have only started to appear in the
last two decades, and mainly since the turn of the millennium. Against this background, one
can rightly speak of a young research field. Accordingly, this might be one of the reasons
why no fitting watchword such as Cultural Finance or Culture and Finance has
emerged, despite the justifiability of such terminology.
<<< Insert Table 3 about here >>>
Once again, one study should be highlighted in order to demonstrate the fundamental approach of Cultural Finance. On the basis of Schwartzs culture model, Chui, Lloyd and Kwok
(2002) empirically investigate corporate capital structures in a global country-portfolio. They
conclude that the internationally strongly divergent relevance of debt financing may be explained by the different relevance of cultural aspects in the individual countries.
One research field of Finance, in which the relevance of cultural aspects is immediately evident, can be illustrated by Islamic Banking, or Islamic Finance.22 In this young and rapidly
growing subdomain of Cultural Finance, the cultural and legal conditions of Islam are taken
into consideration in the creation and issuing of financial products, in order to provide investment opportunities which are consistent with the Muslim faith. Since this is a topic which
is currently dominated by practitioners contributions, and the analysis of intercultural aspects
plays, at best, a minor role, the corresponding contributions have been omitted from Table 3.
Nevertheless, this is an interesting subdomain of Cultural Finance, which particularly considers religious-cultural values and norms that have their origins and roots in the Koran, and
which are, to some extent, reflected in the Islamic law, Shariah. Although it may be granted
that this form of Cultural Finance in comparison to western cultural zones incorporates

22

An introduction to this field can be found in Iqbal/Mirakhor (2007) and Breuer/Quinten (2008).

13

particular circumstances, which would not necessarily exist in such intensity in other cultures,
it does provide an example of how a certain cultural environment may exert substantial influence on the field of Finance. Furthermore, the domain of Islamic Finance indicates the direction which Cultural Finance, accordingly developed, might take. If implementation orientation
is regarded as the ultimate goal of Business Studies, aiming to provide practitioners with recommendations, there ought to exist, for instance, Western European Finance or AngloSaxon Finance when Cultural Finance has realized its full development. On the basis of theoretical deliberations, financial, culturally dependent recommendations should be elaborated
for implementation in financial practice. However, on the path to this ultimate goal, the findings of the above studies have to be examined. Three criteria, content, epistemological
methodology and argumentation lend themselves well to this purpose:

Content: Observing the studies listed in Table 3 with regard to content, it could be said
that particularly in the field of Corporate Finance as well as in Portfolio Management,
several studies have contributed to the explanation of empirically derived international
behaviour differences. Cultural aspects are capable of acting as an explanatory determinant for internationally diverging behaviour in Corporate Finance practice, for example, with regard to capital structure or dividend policy. Culture also promises a solution to dealing with the different types of corporate governance systems. Furthermore, in the portfolio management and risk management literature, successful attempts have been made to provide explanations for country-specific investor behaviour, as well as to give culturally oriented recommendations concerning asset allocation. Only issues relating to performance measurement in portfolio management have
not been investigated in Cultural Finance up to now. Also, approaches to the third
subdomain of Finance Capital Budgeting do, to our best knowledge, not exist.

Epistemological methodology: Most of the work in the domain of Cultural Finance

has been almost exclusively in the form of empirical studies. Not only in the literature
survey above is there a lack of theoretical approaches that link economic and financetheoretical models explicitly to cultural aspects. One of the few exceptions is the well
known (economic) approach of Greif (1994), in which he derives an Institutional Economics principal-agent model from the historical example of late Medieval trading nations, demonstrating that a particular culture is a necessary (non-market) mechanism
for trading if a market is to operate well. Concerning culturally determined differences
in Finance, occasionally theoretical deliberations are found in fragmentary form, such
as in Antonczyk et al. (2008) as well as in Breuer (2008). Contributions from Islamic

14

Finance sometimes display model-theoretical content, too, when dealing with the issue
of Islamic Financial Engineering, as in Iqbal and Khan (2005).

Argumentation: Furthermore, consideration of the prisoners dilemma as well as of the

institutional model of Williamson clarifies that cultural factors may influence economic behaviour both indirectly and directly. However, in the present Cultural Finance literature, there has been less argumentation about the direct influence channel
on the behaviour of individual decision-makers.23 As Table 3 basically shows, those
approaches dominate which deal with the indirect influence of culture on finance, for
example the specific development of stock markets with their legal and contractual
regulations such as corporate governance systems. Only recently, studies of the direct
way culture works appear to become more important.

5. Positioning and Definition of Cultural Finance in the Literature

How should Cultural Finance, as an autonomous research field be positioned in the literature? Certainly, it is located at the interface between Finance and the social sciences. This
statement also holds for the already established and quite popular domain of Behavioural Finance.24 Indeed, various parallels, also in terms of content, can be drawn between Behavioural
Finance and Cultural Finance. In particular, both share a central commitment to basing their
analyses on a concept of mankind which has a behavioural science foundation, thus both
strictly rejecting the neoclassical economic man, which many areas of Finance still use as a
foundation model. Primarily, it is the attribute of unbounded rationality that is omitted or
modified by the observation of empirically established rationality defects. However, although
Behavioural Finance assumes bounded rationality to be valid for most countries,25 Cultural
Finance implicitly supports the diverging relevance of certain behavioural patterns between
countries, and thus rationality defects.26 A number of confirmations of these Cultural Finance
assumptions could be found in empirical cross-cultural psychology: Levinson and Peng
(2007) demonstrate, for instance, the culture-specific relevance of the popular rationality defect framing, which is often studied in Behavioural Finance. Furthermore, the two concepts
of loss aversion and overconfidence cannot simply be treated as having equal validity in

23

Cf. Castro/Desender/Escamilla (2007).

Cf., e.g., Barberis/Thaler (2003) for a survey of popular Behavioural Finance approaches.
25
Cf. Levinson/Peng (2007).
26
Cf. Statman (2008) for a similar approach.
24

15

all countries.27 Cultural Finance could, therefore, successfully close the research gap concerning the question of how international divergence and culturally conditioned rationality defects
impact on financial issues. Thus, Cultural Finance could greatly enrich the findings of Behavioural Finance.
More points of contact with other Finance research fields arise from the objective of Cultural
Finance, namely the explaining of different international financial practices. The same objective is pursued by the research field of Law and Finance, which considers legal differences
as explanatory determinants. The studies by La Porta, Lopez-de-Silanes, Schleifer and Vishny
doubtlessly rank among the most influential papers on this approach, having produced some
remarkable empirical evidence during the last decade.28 The starting point for these authors is
that legal investor protection of a given country is dependent on the respective underlying
common law or civil law legal traditions. Since, in addition, enhanced protection of minority
shareholders is an important determinant of stock market development in any country, several
international financial phenomena can thus be explained.29
Stulz and Williamson (2003) have, however, reservations about any profound explanatory
power of legal differences, and pose the question of why legal differences between countries
cannot simply be eliminated if, for example, improved investor protection were to bring about
an enhanced development of the stock market. The Economic Institutions model of Williamson (2000) presented above may provide an answer: legal regulations may be found at level 2
and are influenced in so far by level 1, and are accordingly, in a general sense, part of the culture. Laws should, then, be suited to the underlying cultural values if they are to be efficient
and effective in the long-run.
Even though legal differences may provide a good, descriptive contribution to the analysis of
country-specific characteristics, and can certainly represent the culture of a society in part,
their sole consideration would neglect key determinants with deeper roots in a society.30 Cultural Finance might be in a position to guarantee a deeper approach and thus sustainably enrich the approach already taken by Law and Finance in explaining internationally divergent
financial issues.

27

Cf. Fan/Xiao (2006) or Chui/Titman/Wei (2008) for example.

Cf. La Porta/Lopez-de-Silanes/Shleifer (2008) for an introduction to this field and for a survey of different
approaches.
29
Cf. also La Porta et al. (1997) for corporate financial policies, La Porta et al. (2000) for dividend policies as
well as Beck/Demirguc-Kunt/Levine (2003) for financial development.
30
Cf. also Licht/Goldschmidt/Schwartz (2005) and Ayyagari/Demirg-Kunt/Maksimoviv (2008).
28

16

6. Conclusion and Future Prospects

The existence of cultural differences in value convictions between different countries leads to
the question of the extent to which such culturally divergent backgrounds may explain international differences in business and economics via the direct and indirect influence of behavioural patterns. Particularly differences in financial practices represent an interesting field of
research. In recent years, studies in the domains of Behavioural Finance and Law and Finance have shown that the purely self-interested, rationally thinking and context-independent
homo oeconomicus from traditional, neoclassical finance theory provides an inadequate
description of real-life financial practices.
In this paper, it has been demonstrated that an autonomous field of research, which considers
cultural aspects in the analysis of financial issues, has the potential to highlight and to eliminate weak points in established fields of research. These new findings might enable Cultural
Finance to achieve an autonomous standing in the Finance literature.
Despite the remarkable achievements which have been made by Cultural Finance so far, the
evident gaps of this young research area as detailed in Section 4 should not be overlooked
at this point: Even though improvements in all three criteria (contents, epistemological methodology, and argumentation) are conceivable and desirable, the next step for Cultural Finance
would be a theoretical foundation for the already empirically confirmed findings especially
in the area of Corporate Finance).
Unless Cultural Finance wishes to be a purely empirical field of research, the lack of general
theoretical contributions should be resolved. The following considerations outline possible
starting points:
1) Concept of mankind: It has become obvious in the game-theoretical example of the
prisoners dilemma that an individual who is acting according to his or her cultural
values differs from the purely self-interested, rationally thinking, and contextindependent homo oeconomicus in all aspects of behaviour. In this respect, the replacement of the homo economicus by multiple heterogeneous homines culturales
would be a promising approach for Cultural Finance. This homo culturalis would be
characterized particularly by his context-dependent preferential structures, whereby
the respective value structure of the underlying culture would create the preferencedetermining context. Following on from the heterogeneity of cultures, comes the postulate of diverse homines culturales as a specific concept of mankind in Cultural Finance.

17

2) Theoretical framework: The Economic Institutions model of Williamson has indicated

that the theoretical context of New Institutional Economics might be an adequate theoretical framework for introducing cultural aspects into economic theory. The efforts of
the research programme Cultural Economics (Kulturelle konomik)31, which attempts to explain theoretically the relationship between economics and culture could
be seen as a guide model for Finance. In the context of New Institutional Economics,
historical economic developments are analyzed according to the influence of their underlying cultures. In this spirit, the numerous principal-agent-models in finance research, for instance, could have the potential to incorporate cultural factors. The theoretical framework on the part of cultural research would be provided by the culture
models introduced above, which have the ability to consider the relevant cultural aspects in a closed and well founded approach. This might be a potential advantage of
Cultural Finance vis vis Behavioural Finance which has, as yet, not been able to
develop a closed theory of bounded rationality which is why such approaches often
harvest criticism for being casuistic.
3) Modelling approach: Concerning the modelling of cultural values, building a bridge
over to the neighbouring discipline Behavioural Finance might be a profitable step.
The meaningfulness of this connection is based on the idea that the theoretical mechanism of culture may be explained at least partly by aspects of bounded rationality. This
approach earns its justification from the duality principle of cultural research, which
postulates an explicit consideration of the reciprocal relationship between culture and
actual behaviour, as well as of the empirical confirmation of the effect of culture on
the observable behaviour patterns, demonstrated in the impact chain of culture. Thus,
via hypothetical connections between rationality defects and types of culture, the results of model-theoretical investigations into the influence of behavioural anomalies in
areas of Finance could be used as an instrument for drawing conclusions for the potential modelling of cultural aspects. Moving within the closed and founded culture theory in doing so and simply using the components of Behavioural Finance for illustration, the objection of casuistics mentioned above should not be transferred.

As this contribution has demonstrated, as of yet, published studies in the domain of Cultural
Finance have given rise to the hope of generating a considerable increase in findings in the

31

Cf. Blmle et al. (2005).

18

area of modern Finance. The resulting improvements in understanding the relevance of cultural values for financial decision-making should finally enable the derivation of action guidelines for corporate decision-makers under explicit consideration of cultural aspects. The particular actuality of this topic with regard to the numerous debates about the consequence of
globalization suggests that Cultural Finance will be a fast expanding research area, the development of which will be regarded with some excitement.

19

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26

Figure 1: Impact Chain of Culture

Culture
Values

Attitudes

Behaviour

27

Table 1: Overview of Important Cultural Models

Culture Models

Parsons/Shils (1951)

Kluckhohn/Strodtbeck (1961)

Hall (1976)

Hofstede (1980)

The Chinese Culture Connection

(1987)

Trompenaars (1993)

Schwartz (1994)

Project GLOBE (1999)20

Inglehart/Baker (2000)

Cultural Dimensions

Universalism vs. particularism

Individualism vs. collectivism
Neutral vs. emotional
Specific vs. diffuse
Achievement vs. ascription
Human nature orientation
Nature orientation
Relational orientation
Time orientation
Activity orientation
High- vs. Low-context
Monochronic vs. polychronic time
High vs. low territoriality
Individualism vs. collectivism
Power distance
Uncertainty avoidance
Masculinity vs. femininity
Integration
Confucian dynamism
Human-heartedness
Moral discipline

Relationship with people

Universalism vs. particularism
Individualism vs. collectivism
Neutral vs. emotional
Specific vs. diffuse
Achievement vs. ascription
Attitudes to time
Attitudes to (natural) environment
Conservatism
Intellectual and affective autonomy
Hierarchy
Mastery
Harmony
Egalitarian commitment
Uncertainty avoidance
Power distance
Collectivism I
Collectivism II
Assertiveness
Gender egalitarianism
Future orientation
Performance orientation
Human orientation
Traditional vs. secular-rational
Survival vs. self-expression

20

Cf. House et al. (2002) for an introduction to this project.

28

Figure 2: Model of Economic Institutions Following Williamson (2000)

Culture
(informal institutions):
Values, religion, traditions,
customs
-------------------Social theory

Level 1

Constitutional environment:
Formal rules in the shape of law
and order
-------------------Economics of property rights,
political theory

Level 2

Governance structure:
Formal regulations in shape of
specific contractual agreements
-------------------Transaction cost economics

Level 3

Incentive mechanism:
Individual incentives of
optimizing resource allocation
-------------------Agency theory, neoclassical
economics

Level 4

29

Table 2: Culture in Business Studies

(1) Author

(2) Key Statement

(3) Culture

(4) Cultural Zone

Management; management behaviour; leadership

Hofstede (1980);
Hofstede/Bond (1988)

Management practices dependent on

cultural background of the addressed
country

Culture model of
Hofstede

Global (but in a company)

Newman/Nollen
(1996)

Efficiency of management practices

depends on their cultural coherence

Cultural model of
Hofstede

Western European,
Asian

Licht (2001)

Relationship between cultural values

and deciding between stakeholder
and shareholder orientation

Culture model of
Schwartz

Western European,
Asian, Anglo-Saxon

House et al. (2004)

Relationship between cultural coherence and effectiveness of leadership

Cultural Model
Project Globe

Global

Organizational theory

Hofstede et al. (1990)

Organizational structure requires the

consideration of cultural backgrounds

Culture model of
Hofstede

Western European
(Denmark, Netherlands)

Harrison et al. (1994)

Culture as a determinant of different

forms of organizations

Culture model of
Hofstede

Asian, Anglo-Saxon

Accounting: external, internal

Mckinnon (1986)

Historical reforms in accounting

systems are associated with cultural
change

Social systems

Asian (Japan)

Gray (1988)

Different (external) accounting standards can be ascribed to cultural

aspects

Culture model of
Hofstede

Global

Schultz et al. (1993)

Reliability of internal accounting

systems depends on the consideration
of cultural aspects

Culture model of
Hofstede

Western European
(France, Norway),
Anglo-Saxon (USA)

Kachelmeier/Shehata
(1997)

Cultural values have an impact on the

effectiveness of internal monitoring
systems

Individualism vs.
collectivism
(Hofstede)

Anglo-Saxon (USA),
Confucian

Marketing (advertising); consumption behaviour

de Mooij (1998)

Consumption behaviour depends on

cultural values

Culture model of
Hofstede

European

Dahl (2004)

Relationship between local culture

and the impact of advertising stimuli

Culture model of
Hofstede

Global

30

Nakata/Sivakumar
(1996)

Relationship between product development and national culture

Culture model of
Hofstede

Global

Aaker/Williams
(1998)

Different effects of emotional stimuli

in different cultures

Individualism vs.
collectivism
(Hofstede)

Anglo-Saxon (USA),
Confucian (China)

Economic development (economic history); entrepreneurship

Tabellini (2005)

Culture with causal effect on economic development

Culture model of
Inglehardt

Western European

Guiso/Sapienza/
Zingales (2006)

Relationship between culture and

economic development

Ethnic groups,
religions, World
Value Survey

Global

Wennekers et al.
(2007)

Culture has an impact on the dissemination of entrepreneurship

Culture model of
Hofstede

Western European,
Asian (Japan), AngloSaxon

31

Table 3: Culture in Finance

Focus

Author

Culture

Cultural Zone

Main Findings

Financing
environment

Capital structure

Corporate Finance
Stonehill/Stitzel
(1969)

No explicit measuring21
(local norms)

Western European, Asian

(Japan), Anglo-Saxon

Cross-country differences in corporate financial structure are caused by many

environmental variables such as local norms or national attitudes towards risk.
Localised debt structures are a reasonable result of financial decision-making.

Sekely/Collins
(1988)

No explicit measuring
(historical/meaningful
cultural zones)

Global

Grouping of countries concerning cultural familiarity shows differences in financial (debt) structures between these groups, so cultural differences are correlated with a significant country effect in determining capital structures.

Chui/Lloyd/
Kwok (2002)

Culture model of Schwartz

Global

Different capital structures around the world are explicable by means of differences in national culture. In particular, countries with high scores on conservatism and mastery tend to have lower debt ratios.

Griffin/Li/Yue/ Zhao
(2009)

Culture models of
Schwartz + Hofstede

Global

Capital structure decisions of foreign joint ventures are influenced by national

culture of the foreign managers because the cultural values conservatism, mastery and uncertainty avoidance directly and indirectly (through their indirect
effects on e.g. investment environment) affect leverage decisions.

Stulz/Willamson
(2003)

No explicit measuring
(Religion and languages)

Global

Culture proxies religion and language can give some explanation why investor protection differs across countries. So, catholic countries have weaker protection of investor rights than protestant countries.

Kwok/Tadesse
(2006)

Culture model of Hofstede

(uncertainty avoidance)

Western European, Asian

(Japan), Anglo-Saxon

Culture is a significant determinant in the development of financial systems

(bank-based vs. capital market-based). Especially, countries with higher uncertainty avoidance are likely to have bank-based systems.

21

No explicit measuring means that culture is not measured by means of explicit instrumental variables in these studies.

32

Cash management/ Financial planning

Financing
environment

Breuer/
Salzmann (2008)

Culture model of Schwarz

Global

The structure of corporate governance systems represented by six dimensions

is determined by cultural value orientation. Altogether, countries with stronger
emphasis on conservatism, egalitarianism, and harmony tend to bankbased
corporate governance systems.

Malul/Shoham
(2008)

Culture model of Hofstede

Global

Cultural factors have an impact on concentration in a countrys banking sector.

The banking sector of countries with more individual than collective values
and/or more power distance is less concentrated.

Global

Country differences in importance of earnings management are related to differences in cultural values. Egalitarism and conservatism (Schwartz) and individualism (Hofstede) have a negative impact on the magnitude of earnings management, while uncertainty avoidance positively effects earnings manipulations. In
general, the study shows that culture not only influences formal institutions but
also directly managerial (mis-)behaviour.

Castro/
Desender/
Escamilla (2007)

Culture models of
Schwartz + Hofstede

Ramirez/ Tadesse
(2007)

Culture model of
Hofstede

Global

Levels of corporate cash holdings are influenced by cultural background of a

firm. In particular, the more uncertainty avoidance is given in a country, the
more cash is held by firms of this country. But, multinationality of the firm can
moderate this culture effect on corporate cash holding.

Chang/
Noorbakhsh (2008)

Culture model of
Hofstede

Global

International levels of corporate cash holdings are influenced by cultural background of a firm. Corporate managers in countries with high scores on uncertainty avoidance and masculinity tend to hold more cash.

Fidrmuc/Jacob
(2008)

Culture model of Hofstede

Global

Dividend payout strategies around the world could be explained by cultural

values. In particular, high level of individualism and low levels of uncertainty
avoidance and power distance leads to higher dividend payouts in the given
country. Moreover, cultural effects on dividends are stronger than legal protection effects.

Shao/Kwok/
Guedhami (2008)

Culture model of Schwartz

+ Project Globe

Global

Country variations of dividend levels can be explained by national culture in an

agency-theoretical context. More specific, higher conservatism scores lead to
higher dividend payouts while higher mastery leads to lower dividend levels.

Global

Dividend payout strategies across countries could be explained by differences in

cultural values, even after controlling for countrys corporate governance factors. When uncertainty avoidance is high, dividend levels depend on the strength
of corporate governance such as shareholder rights protection. Long-term orientation has a negative impact on firms dividend payout.

Bae/Chang/Kang
(2009)

Culture model of Hofstede

33

Financial
engineering

M&A

Weber/Shenkar/
Raveh (1996)

Culture model of
Hofstede

Chakrabarti/
Gupta-Mukherjee/
Jayaraman (2009)

Culture model of Hofstede

Giannetti/Yafeh
(2009)

Culture model of Hofstede;

Language and religion

Anglo-Saxon (USA),
Western European

National culture has an essential effect on processes and outcomes of mergers &
acquisitions transactions. For international M&As, national culture differences
are a much better predictor than corporate culture differentials for post-merger
integration.

Global

The performance of cross-border M&As and the cultural distance of the acquirer
and the target are correlated. There is a positive relationship of the long-run
performance and cultural distance measured by a combined cultural distance
index and by alternative culture proxies such as religion and language.

Global

The effects of cultural differences on financial contracting are studied by using

the example of international syndicated bank loans. In short, lead banks tend to
offer smaller loans at a higher interest rate to more culturally distant borrowers.
The risk sharing within the bank syndicate is culturally biased as well.

National stock market characteristics

Portfolio and Risk Management

Western European, Anglo-Saxon

The importance and the development of stock markets in several countries differ
depending on nations cultural dimension. So, countries with high levels of
uncertainty avoidance and low level of masculinity (high femininity) have more
capitalized stock markets than other countries.

Global

Countries relationship orientation measured by cultural dimensions of power

distance and collectivism has a positive effect on the volatility of national
stock markets, i.e. culture could be an explanation determinant of financial market behaviour.

Culture model of
Hofstede

Global

Cross-country differences in ownership patterns can be explained by cultural

determinants. For instance, higher country level of uncertainty avoidance leads
to a higher fraction of long-term shareholders and higher levels of masculinity
and uncertainty avoidance lead to more concentrated ownership structures.

Trust as a cultural component

Western European, Anglo-Saxon (USA)

Trust is an important determinant for stock market participation. The level of

trust can explain most of cross-country variation in stock market participation.
So, cultural difference in trust could be an additional explanation factor in deciding how to structure portfolios with regard to stocks.

de Jong/
Semenov (2002)

Culture model of Hofstede

Pirouz (2004)

Culture model of
Hofstede

de Jong/
Semenov (2006)

Guiso/Sapienza/
Zingales (2008)

International asset allocation

34

Grinblatt/
Keloharju (2001)

Language; geographical
proximity (nationality)

Griffin/Ji/Martin
(2003)

No explicit measuring
(attitudes to risk)

Anderson/ Fedenia/
Hirschey/Rantala
(2007)

Siegel/Licht/
Schwartz (2007)

Beugelsdijk/Frijns
(2008)

Chui/Titman/Wei
(2008)

Aggarwal/ Kearney/
Lucey (2009)

Culture model of
Hofstede

Culture model of Schwartz

(egalitarism)

Culture model of Hofstede

Culture model of
Hofstede (individualism)

Culture model of
Hofstede

Western European
(Finland)

Cultural proximity has impact on investor behaviour in stock trading. Distance,

language, and cultural background influence the holding, buying and selling of
stocks leading to home bias in the portfolio structure. This effect is even
stronger for households and less savvy institutions than for most investmentsavvy institutions.

Global

Cultural differences could have an impact on returns of momentum strategy.

When macro-economic variables lack the ability to predict differences of crossnational market behaviour, culture could be a meaningful explication variable
for e.g. momentum profits.

Global

Foreign diversification and home bias in international asset allocation of institutional investors can be explained by a societys culture. In short, uncertainty
avoidance leads to more home bias and less diversification in foreign equity
holdings, while individualism and masculinity lead to less home bias and more
foreign diversification.

Global

Cross-border investment flows can be explained by cultural values. Countries

distance in their orientation toward egalitarism has a significant (negative) impact on cross-national investment flows of equity and debt. This culture effect
works indirectly (e.g. via policy choices), but even directly via managers behaviour.

Global

Home/foreign bias in international asset allocation can be explained by a societys culture and the cultural distance between two markets. So, foreign bias is
lower in nations characterized through high levels of uncertainty avoidance and
higher in nations with high scores on individualism. Moreover, the greater the
cultural distance between two countries the smaller is their foreign bias.

Global

Cultural differences have an impact on returns of investment styles. In particular, momentum strategy profits are strongly related to the countrys level of
individualism. The argumentation is based on a positive relationship between
the behavioural effects of overconfidence and self-attribution bias and the degree of individualism.

Global

Culture is a determinant in foreign portfolio investment. Especially, power distance has a negative effect of cross-border holdings of debt and equity, but uncertainty avoidance, masculinity and individualism have positive effects. In
addition, the cultural distance index is positively correlated to geographical
distance leading to less foreign portfolio investments.

Insurance

Asset
management

35

Beckmann/
Menkhoff/Suto
(2008)

Culture model of
Hofstede

Chui/Kwok (2008)

Culture model of Hofstede

(uncertainty avoidance)

Western European (Germany), Asian, AngloSaxon (USA)

Asset managers views and behaviour are influenced by cultural differences.

National culture characteristics can explain different importance of herding
behaviour, tracking error and research effort of asset managers across different
countries. Also, country-specific staffing in asset management, e.g. age, experience, gender or the hierarchy structure, is determined by culture.

Global

Life insurance consumption figures differ across countries, depending on culture. Countries characterized by individualism tend to have more life insurance
consumption, whereas there is a negative relationship in countries with high
levels of power distance and masculinity.