Culture and Cultural Distance: A New View
on the Determinants of Integrated Reporting
Adoption
Mathijs Westerink
ABSTRACT: To get a better understanding of the differences in voluntary Integrated Reporting practices at country-, as well as company-level, this study uses the cultural dimension individualism vs. collectivism specified by Hofstede (2001) and the cultural distance model specified by Kogut and Singh (1988) for explaining these differences. The study finds that first, the level of individualism within a country is negatively and significantly associated with the voluntary disclosure of an integrated report, suggesting that companies operating in more collectivistic countries are more likely to voluntary disclose an integrated report. Second, the presence of a more collectivistic foreign director in comparison with the company’s home country’s culture, significantly influences a company’s likelihood of voluntarily disclosing an integrated report. As such, the level of cultural distance strengthens the relationship between a country’s level of collectivism and voluntary disclosure of an integrated report. The findings suggest that cross-country cultural differences and company-specific Board of Directors compositions influence Integrated Reporting practices of companies.
KEYWORDS: Integrated Reporting Disclosures, National Culture, Hofstede- Gray Theory, Board of Directors Composition, Foreign Director, Cultural Distance
Name author: Mathijs J. Westerink Student ID number: 2250829
Supervisor: dr. R.B.H. Hooghiemstra Co-assessor: dr. S. Lee
Date: June 2016
Master Thesis A & C Accountancy, University of Groningen Word count: 11.399
1 1. Introduction
Since the early 90’s, we have witnessed an increased awareness that social and environmental performance of a company are as least as important as the company’s financial performance. Elkington (1997) stated this movement in an idea called the triple bottom line, incorporating company’s social, financial and environmental performance in one single concept. Elkington (1997) argued that companies should not only focus on the financial, but should consider their company’s social and environmental impact as well, introducing the concept of People, Planet, Profit (Norman and MacDonald, 2004).
The financial crisis and corporate scandals at the beginning of the 21st century, involving
companies as WorldCom and Enron, led to a similar movement for two reasons. First, the scandals were the result of an increased complexity present in companies worldwide. This increased complexity led to a situation where monitoring relationships within and between companies became increasingly difficult, making them less transparent (ACCA, 2011). Second, due to the financial crisis and corporate scandals, investors and other stakeholders lost their trust in corporate financial reports and as a result, its usefulness in the investors’ decision-making process (ACCA, 2011). Due to this increase in complexity and lack of trust, an increased awareness arose for an all-embracing view of a company. Investors and other stakeholders began using both financial as well as non-financial information to enhance their decision-making process and preclude similar problems in the future. This awareness initially led to the publication of sustainability, environmental and social responsibility reports in addition to the company’s financial report. Hereafter, companies started combining these reports, leading to perhaps the latest and most advanced stage of the movement introduced by Elkington (1997), called Integrated Reporting (IR) (Gray and Gillies, 2015).
IR is an initiative started in 2010 by the International Integrating Reporting Council (IIRC). The IIRC is a coalition of various regulators, investors, companies, standard setters, accounting
professions and NGOs (IIRC, 2013, p. 1). According to the IIRC, IR can be defined as "a process
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about the value creation over time and related communications regarding aspects of value creation” (IIRC, 2013, p. 33). The result of IR is an integrated report, which the IIRC defines as: “a concise communication about how an organization’s strategy, governance, performance, and prospects, in the context of its external environment, lead to the creation of value over the short, medium, and long term” (IIRC, 2013, p. 7). IR has primarily been created for two reasons. First, to restore investors’ trust and enhance the accountability and stewardship functions of corporate reports and second, provide investors with the information needed to enhance their decision-making process.
Since the IIRC started the initiative in 2010, IR practices have been introduced as principle- rather than rules-based. As a result, IR has been adopted worldwide on a voluntary basis leading to differences between countries in terms of adoption. Moreover, due to its discretionary characteristic, IR disclosures do not only vary between countries but also between companies. Now, six years after the introduction of IR, there is a great variety in the adoption of the initiative around the world. The goal of this study is to get an understanding of the differences in voluntary IR disclosure and explain IR adoption around the world.
Recent studies, not focusing on IR per se, examined potential reasons for the disclosure of information on a voluntary basis (Adams and Kuasirikun, 2000; Hope, 2003; Hooghiemstra et al., 2015). These studies found that financial reporting practices of companies are dependent on the environmental context in which they operate, explaining differences in disclosure between countries as well as companies (Mueller et al., 1991; Haniffa and Cooke, 2002). Examples of environmental factors which may affect disclosure practices are country-specific institutional pressures as investor protection, capital markets, legal system, rule of law, religion and accounting and regulatory frameworks (Watts and Zimmermann, 1978; Dye, 1986; Meek et al., 1995; Gray, 1998; Whitley, 1999; Haniffa and Cooke, 2002; Doupnik and Tsakumis, 2004; Campbell, 2007; Hooghiemstra et al., 2015). Besides these, one important and often researched country-specific institutional pressure which may explain voluntary disclosure differences is culture (Hofstede, 1980; Gray, 1988; Maznevski, 1994; Hope, 2003; Schwartz, 1994; Hooghiemstra et al., 2015).
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Culture can be described as the collective programming of the mind that distinguishes members of one group from members of another e.g. nations, companies or occupations (Hofstede, 2001). This collective programming concerns shared values, norms and beliefs of in-group members and the basic work-related values of individuals, influencing the way of people think, act and feel. As such, culture determines what is considered accepted human behavior in a particular society (Hofstede, 2001; García-Sánchez et al., 2013; Hooghiemstra et al., 2015; Azar and Drogendijk, 2016). Besides Hofstede, Schwartz (1994) proposed a similar definition for culture, stating that culture is a set of beliefs and actions that influences how people make decisions and is therefore the basis of an individual’s decision-making process (Schwartz, 1994). In a similar vein, Maznevski (1994) stated that culture is intrinsic for a person, unchangeable, and therefore an inherent type of individual diversity by which differences in individual behavior can be explained (Cimerova, 2015).
Culture as country-specific environmental factor may explain, through the four cultural dimensions proposed by Hofstede (1980) (i.e., uncertainty avoidance, individualism vs. collectivism, power distance and masculinity vs. femininity), differences in individual’s behavior and therefore companies (Hofstede 1980, 2001). Moreover, since accounting and disclosure practices involve interaction between human as well as non-human attributes, disclosure behavior of companies can’t be seen independent of culture as it influences the decision-making process of individuals within companies (Violet, 1983; Haniffa and Cooke, 2002). Based on the above, this study postulates that differences in voluntary disclosure practices of companies, including IR practices, may be culturally determined (Gray, 1988; Jaggi and Law 2000; Tsakumis, 2007; Doupnik, 2008; García-Sánchez et al., 2013; Gray and Gillies, 2015).
Prior literature primarily uses Gray’s (1988) theory of cultural relevance for explaining differences in disclosure practices between companies (Hofstede 1980, 2001; Gray, 1988; Jaggi and Law 2000; Tsakumis, 2007; Doupnik, 2008; García-Sánchez et al., 2013; Gray and Gillies, 2015). Gray argues that the societal values of individuals embedded in the country’s culture may influence an individual’s accounting values. The accounting values (i.e., professionalism, uniformity, conservatism and secrecy) in turn influence the accounting practices of individuals
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and therefore companies, explaining differences between countries and companies (Gray, 1988). The accounting value secrecy will, due to its most significant impact on disclosure, be of particular interest in this study.
Secrecy is the cautious approach to disclosure, influencing the quantity of information disclosed (Gray, 1988). The level of secrecy or its contrary transparency, is particularly dependent on the attitudes and discretion of management and is therefore company-specific. Choosing from the four cultural dimensions of Hofstede (1980), prior literature states that the individualism vs. collectivism cultural dimension is most significantly associated to an individuals’ accounting values and as a result, individuals’ attitudes and discretion towards disclosure (Gray, 1988; Gray and Vint, 1995; Hope, 2003; Han et al., 2010). Therefore, in the context of this study, the relationship between the cultural dimension individualism vs. collectivism and the accounting value secrecy will be of particular interest, potentially explaining differences between countries in terms of voluntary IR disclosure (Han et al., 2010; Hope, 2003; Hooghiesmtra et al., 2015).
As stated above, the level of individualism vs. collectivism influences disclosure practices within countries and therefore companies. However, the results regarding the level of individualism vs. collectivism and various types of disclosure (i.e., environmental, sustainability, corporate social responsibility and financial disclosures) are mixed. For instance, Buhr and Freedman (2001) argue that stakeholders in collectivistic societies are more concerned with greater goods such as the environment and focus on improving the quality of life and as a result, demand more environmental and social information in addition to the company’s financial report. On the other hand, Ioannou and Serafeim (2012) found that individualistic societies are more interested in disclosing corporate social responsibility performance, where Jaggi (1975) and Hope (2003) found that individualistic societies are more interested in disclosing financial information. Due to these mixed results and the fact that an integrated report consist of both financial as well as non-financial information, it will be interesting to see whether a more individualistic society with a more competitive and less secretive environment or a collectivistic society with a greater emphasis on the environment and quality of life is more likely to disclose an integrated report.
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Besides culture at country level, a company-specific characteristic which may influence voluntary disclosure practices is the company’s Board of Directors (BoD). The BoD, a primary element in a firms governance system, has two main tasks. First, their role is to advise management and provide direction to the company. It specifies the mission and vision of the company and formulates goals in order to complete its mission and vision. The second task of the BoD compromises its monitoring role. The aim is to monitor managers’ behavior and the quality of their decision making process (Ruigrok et al., 2007). Besides this direct monitoring role, the BoD and shareholders can indirectly monitor managers’ behavior through a company’s voluntary disclosure practices, making managers accountable (Healy and Pelepu, 2001). The BoD is therefore moreover charged with the responsibility for the company’s disclosure practices.
Each company has a different BoD and each BoD is likely to function differently based on in-group dynamics. These in-group board dynamics are in turn influenced by the individual director’s characteristics e.g. the board’s composition. For example, a company’s BoD may differ in terms of size and individual director’s gender, age, nationality and educational level. These individual director’s characteristics may influence their motivation and decision-making process and therefore, the board’s overall operating effectiveness. In terms of voluntary disclosure practices, individual directors’ characteristics may influences decision-making processes within boards and as such, the overall board’s discretion towards IR disclosure (De Andres and Vallelado, 2008).
Regarding the directors’ characteristics, nationality, measured by the number of foreign directors, will be of particular interest in this study. As stated above, an individual director may influence a company’s disclosure practices indirectly, by influencing the board’s dynamics. In terms of nationality, an individual director may influence, based on their cultural background the board’s overall discretion towards disclosure (Cordano and Frieze, 2000). This study therefore postulates that a foreign directors’ cultural background and in turn a foreign directors’ accounting values may influence the disclosure practices adopted by a company, explaining differences between companies operating in the same country.
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As such, a foreign director may influence a company’s disclosure practices, potentially weakening or strengthening the earlier described relationship between cultural dimensions individualism vs. collectivism and a company’s disclosure practices. For example, when a foreign director from Japan (very collectivistic country) is working for an company in the US (very individualistic country) he or she may negatively influence (weaken) the relationship between the level of individualism and a company’s IR practices. The described difference in the level of individualism vs. collectivism between Japan and the US can be explained by the concept of cultural distance. Prior literature states that the cultural distance between countries can be described as the difference in shared norms, ideas, values and beliefs from one country compared to another (Kogut and Singh, 1988; Chen and Hu, 2002; Hofstede, 2001; Azar and Drogendijk, 2016). Stating that the bigger the difference between countries in terms of national culture, the bigger the difference in managerial and organizational behavior between companies and as such, may explain differences between countries in terms of disclosure practices (Kogut and Singh, 1988; Larimo, 2003). Collectively, this study uses the concept of cultural distance between the country were the company’s headquarter is located and the company’s foreign directors’ home country for potentially explaining differences in voluntary IR practices between companies operating in the same country (Wang and Schaan, 2008).
In sum, the goal of this study is to get an understanding of the differences in voluntary IR disclosure and discover which factors drive IR adoption between countries, based on the level of individualism vs. collectivism and within countries, based on the cultural distance between companies and their foreign directors. Accordingly, this paper focusses on the following research questions:
A. To what extent does the level of individualism vs. collectivism within a country influences voluntary disclosure practices of an integrated report? And,
B. To what extent does the presence of one or more foreign directors negatively influence the relationship between individualism vs. collectivism and voluntarily disclosing an integrated report?
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This study seeks to provide a number of contributions to the literature. First, it seeks to contribute on the relationship between cross-country cultural differences and voluntary disclosure practices in general (Meek et al., 1995; Haniffa and Cooke, 2002; Hooghiemstra et al., 2015). Previous studies that examined this relationship found that culture does influence disclosure practices (Doupnik and Salter, 1995; Adams and Kuasirikun, 2000; Jaggi and Low, 2000; Haniffa and Cooke, 2002; Hope, 2003; Tsakumis, 2007; Doupnik, 2008). In terms of cultural dimensions, prior literature particularly used a broad view on culture, incorporating multiple cultural dimensions simultaneously leading to weak or inconsistent results (Meek et al., 1995; Haniffa and Cooke, 2002; Hope, 2003). In contrast, this study uses a more narrow view, incorporating only the individualism vs. collectivism cultural dimension and thereby seeks to provide a more in-depth understanding regarding the effects of individualism (collectivism) on disclosure practices as prior results regarding the level of individualism vs. collectivism in relation with voluntary disclosure practices are mixed. For example, Buhr and Freedman (2001) found that collectivistic societies are more interested in voluntarily disclosing environmental reports, where García-Sánchez et al. (2013) found that collectivistic societies are more interested in disclosing an integrated report (Buhr and Freedamn 2001; García-Sánchez et al., 2013). Ioannou and Serafeim (2012) found on the other hand that individualistic societies are more interested in the disclosure of CSR performance, where Jaggi (1975) and Hope (2003) state that individualistic societies are more likely to disclose financial reports (Jaggi, 1975; Hope, 2003; Ioannou and Serafeim, 2012). Due to these mixed results and the fact that an integrated report consists of both financial as well as non-financial information, this study seeks to provide additional evidence regarding the impact of individualism or collectivism on disclosure practices. The results thereby may help standard setters and policy makers in setting rules and guidelines in terms of disclosure on cross-country level.
Second, this paper seeks to contribute on the relationship between culture and IR adoption by focusing on the level of individualism vs. collectivism as a determinant for explaining cross-country IR differences. Prior literature regarding the relationship between culture and IR practices is, due to the short-lifespan of the initiative, limited. García-Sánchez et al. (2013) did examine the relationship between Hofstede’s cultural dimensions and the adoption of IR. They
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concluded that companies located in societies with strong collectivistic values are more likely to publish an integrated report. However, the study of García-Sánchez et al. (2013) was conducted during 2008-2010, a time where the IIRC had not started the IR initiative yet and only a few companies were producing self-declared integrated reports. Moreover, García-Sánchez et al. (2013) included multiple cultural dimensions in their analysis, potentially leading to weak or inconsistent results. In contrast, now, six years after the initiative started and the International <IR> Framework has been developed, more companies have disclosed an integrated report, leading to a bigger and potentially more representative sample. As such, by using a more narrow view on cultural dimensions and a more representative sample, this study provides an in-depth understanding of the impact of the level of individualism vs. collectivism on IR disclosure, potentially leading to more valuable implications for the IIRC, company management and governments in setting IR standards.
Third, this study contributes the literature on the relationship between company’s Board of Directors and voluntary disclosure practices by investigating whether the presence of one or more foreign directors in the BoD potentially influences the company’s likelihood of voluntarily disclosing an integrated report. Prior literature regarding the BoD state that each board performs differently depending on its size, independence and composition (John and Senbet, 1998). In addition, individual directors’ characteristics such as background, skills, age, gender, education and personal incentives may moreover influence board performance and therefore potentially disclosure practices (Goodstein et al., 1994; Golden and Zajac, 2001; Oxelheim and Randoy, 2003; Adams et al., 2008). Regarding voluntary disclosure practices prior studies found that one or more independent non-executive directors, a non-executive director as chairman and the presence of an audit committee positively influences voluntary disclosure practices (Forker, 1992; Malone et al., 1993; Ho and Wong, 2001; Cheng and Courtenay, 2006). This study seeks to contribute to the literature by identifying a new individual director’s characteristic (e.g. nationality) which may influence voluntary disclosure practices and is therefore part of an emerging field which focuses on the antecedents and consequences of the internationalization of the BoD (Field and Keys, 2003; Haniffa and Cooke, 2005; Oxelheim and Randoy, 2005; Musalis et al., 2012). In addition, by focusing on the difference between the level of individualism vs. collectivism between the foreign director’s home country and the country were the company’s
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headquarter is located, this study contributes on the literature regarding cultural distance. Prior studies regarding foreign directors and BoD performance found that foreign directors make better cross-border acquisitions from their home country, are more likely to miss board meetings, are more likely to engage in financial misreporting and have lower firm performance in comparison with domestic directors (Musalis et al., 2012). Hooghiemstra et al. (2016) found a similar effect regarding foreign directors and the level of earnings management, stating that foreign directors are associated with higher levels of earnings management. Where Oxelheim and Randoy (2003) found that foreign Anglo-American directors positively influence firms market value. This study contributes by stating that a foreign director may moreover influence disclosure practices. It thereby complements the literature on BoD characteristics in relation with company disclosure practices and expands insights in board diversity literature. In sum, both the level of individualism vs. collectivism within a country and the cultural distance between a company and the company’s foreign directors contribute to the literature on the number of determinants that may explain differences in terms of IR adoption between countries as well as companies.
This paper is structured in five sections, including this introduction, section 1. Section 2 will outline the relevant literature regarding IR, Gray’s theory and will formally introduce the research hypotheses. Section 3 will describe the method of analysis and the research design. Following this, section 4 will describe the testing of the hypothesis and discuss the results. Finally, section 5 will formulate the conclusions, limitations and possible lines for future research.
10 2. Theoretical framework
This section discusses the main literature regarding IR practices in general, Gray’s theory and Board of Director’s characteristics for the introduction of the two research hypothesis.
Integrated Reporting in general
As mentioned, IR is an initiative started in 2010 by the IIRC to enhance the accountability and stewardship functions of corporate reports and provide users with a more detailed and a comprehensive view of a company (ACCA, 2011). According to the IIRC, “IR is enhancing the way organizations think, plan and report the story of their business and communicating it in a clear integrated way that explains how the resources of an organization create value” (IIRC, 2013, P.2). As such, the primary purpose of an integrated report is to explain to financial capital providers how an organization creates value over time (IIRC, 2013, P.4). The best way to do so is through a combination of both financial as well as non-financial information. As such, an essential aspect of the IR framework, and the main difference with traditional reporting, is the understanding of the interdependencies between financial and non-financial information based on ‘integrated thinking’. In addition, another important difference is that IR uses a broad instead of narrow conceptualization of value. This broad view focusses on the company’s value creation process in the long term by conceptualizing financial as well as non-financial information and enhancing the quality of information available for stakeholders (Gray and Gillies, 2015).
Because IR practices are currently principle-based, disclosures are for the greater part done on voluntary basis (García-Sánchez et al., 2013). Besides South-Africa, no legislation or regulation in any country mandates preparation of an integrated report. However, every year more companies do prepare self-declared integrated reports on a voluntary basis (Mazars, 2015). The question, then, is what drives the differences between companies to voluntary disclose an integrated report? As such, this study tries to examine the differences in voluntary IR practices at country as well as company level based on the impact of cross-country cultural differences and company specific cultural distance.
11 Impact of culture
Gray’s study of cultural relevance in accounting examined the relationship between culture and disclosure practices by hypothesizing an explanatory relationship between Hofstede’s (1980) cultural dimensions and the accounting practices adopted by companies (Gray, 1988; Han et al., 2010). More specifically, Gray proposed that the cultural dimensions of masculinity vs. femininity, individualism vs. collectivism, uncertainty avoidance and power distance would influence the accounting practices adopted by companies by means of two ways. First, influencing individuals, he argued that the shared social values of individuals embedded in a country’s culture would influence an individual’s accounting values. The accounting values (i.e. conservatism, secrecy, professionalism and uniformity) would in turn influence accounting practices adopted by companies, including reporting and disclosure practices (Meek et al., 1995). Second, accounting practices may be influenced through a country’s development of formal and informal institutions. Arguing that companies who face the same informal or formal pressures, may adopt similar patterns of accounting practices, explaining differences between companies operating in different countries (Gray, 1988; Salter and Niswander, 1995).
Various studies have tested Gray’s (1988) theory, for example; Doupnik and Tsakumis (2004) found in line with Gray that systematic financial reporting differences between countries can be explained in terms of cultural difference. Moreover, literature found that companies disclose information in order to comply with the social values embedded in the stakeholders’ culture, explaining disclosure similarities between companies operating in the same environment (Jaggi, 1975; Salter and Niswander, 1995; Haniffa and Cooke, 2002). However, besides the values of stakeholders, the societal values of managers may moreover influence disclosure practices, stating that the cultural determined social values of managers will influence managers’ discretion and their cost-benefit tradeoff towards voluntary disclosure (Crossland and Hambrick, 2011; Hooghiemstra et al., 2015; Azar and Drogendijk, 2016). In line, García-Sánchez et al. (2013) found that countries with similar cultural systems adopt similar patterns of disclosure behavior. They argue that these similarities are the result of the companies’ need to comply with the shared needs of their shareholders arising from the shared culture. Therefore, this study will
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in line with the above postulate that differences between company’s disclosure practices may be culturally determined.
As stated by Gray (1988), the societal values specified by Hofstede (1980) influence an individuals’ accounting values. The accounting values, through which accounting practices in a country in turn may be influenced, can be categorized in professionalism, uniformity, conservatism and secrecy. Choosing from the four accounting values, secrecy will be, due to its most significant association with disclosure, of particular interest in this study (Gray, 1988). Secrecy according to Gray (1988, p.11) is the “preference for a cautious approach to disclosure, considering it a fundamental accounting tribute that stems from the influence of management on the quantity of information disclosed to outsiders”. The level of secrecy or its contrary transparency, is particularly dependent on the attitudes of management and the accountant influenced by management. In terms of disclosure practices, this study postulates that the lower the level of secrecy, the higher the level of transparency of a company’s disclosure practices will be and the higher the likelihood of voluntarily disclosing an integrated report. The question is, then, which cultural dimension has the most significant impact on secrecy and as such, indirectly influences disclosure practices.
Prior literature regarding the impact of cultural dimensions on accounting values found that the individualism vs. collectivism cultural dimension, due to its implication on managers’ work-related values and therefore accounting choice behavior, is connected to all four accounting values (Kessapidou and Varsakelis 2003; Hope, 2003; Han et al., 2010; Bryan et al., 2014; Kanagaretnam et al., 2013). This impact on a managers’ accounting behavior influences in turn a managers’ and therefore company’s disclosure practices (Han et al., 2010).
Focusing on the impact of the individualism (collectivism) on secrecy, prior literature found empirical evidence that the level of secrecy is negatively related to the level of individualism, suggesting that higher levels of individualism will lead to lower levels of secrecy and therefore higher levels of disclosure (Salter and Niswander, 1995). Moreover, Zarzeski (1996) found that the more individualistic a society is, the more likely companies disclose information, stating a lower level of secrecy. Based on the above literature, this study will in
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particular focus the level of individualism and its impact on secrecy for explaining differences in disclosure practices between countries.
Individualism, or the preference for a loosely-knit social framework in which individuals are expected to take care of themselves and their immediate families only, is dependent on the degree of interdependence between individuals (Hofstede, 1980). Implying that the more individualistic a society is, the lower is the degree of interdependence between individuals (Hofstede 1980; García-Sánchez et al., 2013). Furthermore, in individualistic societies people tend to focus on their personal interests, goals and values opposed to in collectivistic societies where people tend to look after each other and greater emphasize the quality of life (Oyserman et al., 2002). As a result, individuals in individualistic societies compete in a more competitive environment were shareholders emphasize and demand more information, making managers more transparent (Jaggi, 1975; Hooghiesmtra et al., 2015). In collectivistic societies on the other hand, which stands for a preference for a tightly knit social framework, people are more concerned towards those closely involved with the firm than with external parties, leading to higher levels of secrecy. As a result, Gray proposed a direct relationship between the societal value individualism and the accounting value secrecy. Arguing that the more individualistic a society is, the lower it ranks in terms of secrecy and the higher the level of disclosure (Gray, 1988; Gray and Vint, 1995; Doupnik, 2008).
As stated above, the level of individualism influences indirectly disclosure practices within countries and therefore companies. However, the results regarding the level of individualism vs. collectivism and various types of financial and non-financial disclosure are mixed. One view emphasizes that individualism is generally positively related to disclosure (Jaggi, 1975; Hope, 2003; Ioannou and Serafeim, 2002). Another view however, suggests that higher levels of collectivism are positively related to disclosure (Buhr and Freedman, 2001; García-Sánchez et al., 2013). Due to these mixed results and the fact that an integrated report consist of both financial as well as non-financial information, it will be interesting to see whether a more individualistic society with a more competitive and less secretive environment or a collectivistic society with a greater emphasis on the quality of life and demand for social and environmental information is
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more likely to disclose an integrated report. As such, it remains an empirical question whether one view dominates the other. Formally:
Hypothesis 1: In what extent is the level of individualism associated with voluntary disclosure practices of an integrated report
Impact of cultural distance
Whether a company voluntarily discloses information is dependent on the managers’ discretion towards disclosure (Clarkson et al., 2008). As mentioned, the discretion of individual managers is in turn influenced by the individual manager’s societal values, dependent on his or her cultural background. However, besides a manager’s cultural background, a company’s Board of Directors (BoD) may as well influence manager’s discretion towards disclosure.
Traditionally, a BoD is an internal governance mechanism. Their aim is to monitor managers’ behavior in order to mitigate agency problems between agents (managers) and principals (shareholders) (Jensen and Meckling, 1976). The monitoring role of the BoD primarily originates from the separation of ownership and control and the resulting information asymmetry, implying that managers have more knowledge and information about the firm than its owners, the shareholders (Fama and Jensen, 1983). As a result, the BoD monitors managers’ behavior on behalf of the shareholders to reduce information asymmetry and prevent managerial malfeasance (Fama and Jensen, 1983). Therefore, the BoD serves as an internal governance mechanism to reduce agency problems and align managers’ and shareholders’ interests, limiting potential managerial self-serving behavior (Lou et al., 2005). Besides this direct monitoring role, BoD’s and shareholders can indirectly monitor managers’ behavior through a company’s (voluntary) disclosure practices, providing information about managerial actions and making managers accountable (Healy and Pelepu, 2001). The BoD is therefore moreover charged with the responsibility for the company’s disclosure practices.
The operating effectiveness of a BoD is a function of the board’s size and composition, stating that each board will behave differently depending on board-specific in-group dynamics
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(John and Senbet, 1998; Adams et al., 2008). For instance, the gender, age, nationality and educational level of individual board directors may influence the decision making process within a board and therefore companies’ disclosure practices (Haniffa and Cooke, 2002; Ruigrok et al., 2007). Regarding these directors’ attributes, this study will specifically focus on the international aspect of the BoD, measured by the number of foreign directors present on a board. A foreign director is a board member who, due to his or her nationality, has a differing cultural background and in turn differing shared social norms and values. These differences may lead to differences in the individual director’s leadership style and a differing discretion towards disclosure (Newmann and Nollen, 1996; Sharma et al., 1999). As such, the cultural background of a director may potentially influence a board’s overall discretion towards voluntary IR disclosure.
Prior literature regarding a company’s foreign director states that a foreign director may increase the operating effectiveness of the BoD as the director may bring additional perspectives, skills and knowledge to the board (Ruigrok et al., 2007). Moreover, a board with one or more foreign directors may prevent too much cohesiveness among board members and raise controversial issues (Forbes and Miliken, 1999; Srinidhi et al., 2011). Based on the above, this study postulates that the differing views and perspectives of foreign directors may influence the board’s overall discretion towards disclosure and in turn, the likelihood of voluntary disclosing an integrated report.
As stated earlier, the level of individualism in a country may influence a company’s disclosure practices. Moreover, the company-specific foreign directors may as well influence disclosure practices, potentially weakening or strengthening the relationship between the level of individualism and a company’s disclosure practices. For example, when a foreign director from Japan (very collectivistic) is working in for a company in the United States (very individualistic) he or she may negatively influence (weaken) the relationship between the country’s level of individualism and the likelihood of disclosing an integrated report. As such, the differences in the level of individualism vs. collectivism between a company and the company-specific foreign director may influence disclosure practices.
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This difference in the level of individualism vs. collectivism between a individual foreign director’s home country and the country where the company headquarter is located, may be explained in terms of cultural distance. Prior literature states that cultural distance between countries can be described as the difference in shared norms and values from one country compared to another (Chen and Hu, 2002; Hofstede, 2001; Kogut and Singh, 1988). Stating that the bigger the difference between countries in terms of culture, the bigger the difference in terms of organizational and managerial behavior between companies, potentially explaining differences in terms of disclosure practices (Kogut and Singh, 1988; Larimo, 2003). Moreover, the foreign directors additional perspectives, skills and knowledge may as well influence disclosure practices through the foreign directors influence on management (Musalis et al., 2012). As such, the above concept of cultural distance is used to measures the difference in terms of individualism vs. collectivism between the country were the company’s headquarter is located and the company’s foreign director’s home country, potentially explaining differences in voluntary disclosure practices between companies operating in the same country (Wang and Schaan, 2008).
In sum, depending on the cultural distance in terms of the absolute difference in the level of individualism vs. collectivism between a foreign director’s domestic culture and the country where the company’s headquarter is located, a foreign director may be more or less willing to disclose an integrated report and therefore, potentially influence the board’s overall discretion towards IR disclosure. Formally:
Hypothesis 2: Higher levels of Cultural Distance in the Board of Directors weaken the association between the level of individualism and the likelihood of voluntary disclosing an integrated report
17 3. Data and Methods
This section describes the variables used and the research methodology deployed for analyzing the data and testing the hypothesis.
Sample and data collection
In order to explain differences in IR practices between countries as well as companies, this study will use hand collected information regarding IR practices of 300 listed companies over the financial year 2014. These listed companies have their headquarters located in one of the following six countries (the number of companies included per country is mentioned); the United Kingdom (68), the Netherlands (32), Germany (50), France (50), South-Africa (50) and the Nordic countries; Sweden (20), Finland (10), Denmark (10) and Norway (10). The sample only includes listed companies because those are more likely to publish (integrated) information to their stakeholders due to the increased public accountability of their operating activities compared to non-listed companies (Gray and Hillier, 2015). Furthermore, because this study is particularly focused on voluntary IR practices, South-Africa will be excluded from the initial dataset due to the mandatory characteristic of IR practices in South-Africa. In addition, companies from which specific information, including dependent, independent and control variables, wasn’t available online were excluded from the sample. This procedure yielded an ultimate sample of 248 listed companies, which distributed as follows: 50 from Germany and France, 20 from Sweden, 10 from Denmark, Finland, Norway, 30 from the Netherlands and 68 for the UK. All the company specific information including companies’ board composition, country-specific values of individualism and the control variables are hand-collected from company annual reports, company website, Spencer Stuart Board index, Asset 4, Orbis, Hofstede and Globe cultural dimensions as recorded by Anne-wil Harzing and other web based means as LinkedIn and Google.
Dependent variables
The dependent variable, whether a company discloses an integrated (IRdisc) is hand collected out of the Sustainability Disclosure Database (SDD) prepared by the Global Reporting Initiative
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(GRI). The SDD is used in line with Gray and Hillier (2015), assuming that companies who produce high quality reports are more likely to register and upload the report in an international database like the SDD (GRI, 2011). The SDD will therefore be representative in terms of present-day IR practices. Whether a company prepares an integrated report or not will be recorded by a dichotomous scale, taking the value of 1 if the company prepares an report and 0 otherwise. Only reports that are integrated according to the SDD are considered an integrated report.
Independent variables Level of individualism
As mentioned, company’s disclosure decisions are dependent on the individual manager’s discretion towards disclosure. This managerial discretion is in turn reflected by cross-country cultural differences, influencing behavior and decision-making processes within companies. The level of individualism (IND) specified by Hofstede (2001) is used as an independent variable for measuring the impact of cross-country cultural differences on IR practices. Hofstede’s (1980) idea of culture is used because it offers attributes in terms of codification the dimensions along a numerical index, making it measurable (Azar and Drogendijk, 2016). The level of individualism vs. collectivism is collected from the website of Anna-wil Harzing: Hofdstede and Globe cultural dimensions. The levels per country may range from a score of 0 (representing a very collectivistic country) to 100 (representing a very individualistic country). When a country scores below 50, the country is considered collectivistic, where a score above 50 is considered individualistic. For instance, a country with the score of 67 (Germany) is individualistic but less individualistic than a country with the score of 89 (United Kingdom).
Cultural Distance
Arguing that the bigger the cultural distance between the cultural background of a company’s foreign director and the company, the more likely the presence of a foreign director will influence the relationship between the level of individualism and the likelihood of voluntarily disclosing an integrated report (Kogut and Singh, 1988). The level of cultural distance (CD) is measured by the highest difference of one or more foreign directors present on the company’s board. The method used for measuring cultural distance is, in line with Kogut and
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Singh (1988) and Azar and Drogendijk (2016), the difference between the score of individualism
in the country where the company’s headquarter is located (𝐼ℎ) and the corresponding culture
score of each foreign director’s home country (𝐼𝑓), algebraically:
CD = (𝐼ℎ − 𝐼𝑓) (1)
The highest differences is calculated in both lower (more collectivistic) as higher (more individualistic) values, however, only the highest difference is included. For example, the company’s Board of Directors of a company located in Germany (level of individualism = 67) has two foreign directors, one from Singapore (level of individualism = 20) and one from the United Kingdom (level of individualism = 89). Because this study looks at the highest difference in terms of absolute value, the level of individualism from the director from Singapore (difference = 47) will be rather than the director from the United Kingdom (difference = 22).
The resulting levels of cultural distance for each company will be subsequently categorized in two variables. One, called CD High, values the scores zero when the difference is negative (a foreign director is more collectivistic) and the absolute value when positive (a foreign director is more individualistic). Another, called CD High Neg, values the scores zero when the difference is positive (a foreign director is more individualistic) and the absolute value when negative (a foreign director is more collectivistic). The distinction is made to evaluate whether a more individualistic or a more collectivistic foreign director will more significantly influence a company’s disclosure practices. Stating that, when the results show a positive and significant relationship for CD High, this would suggest that a company with a more individualistic director is more likely to disclose an integrated report. Where on the other hand, a positive and significant result for CD High Neg, would suggest that a company with a more collectivistic director is more likely to disclose an integrated report.
Control variables Firm size
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Prior literature states that firm size is positively related with voluntary disclosure. Arguing that larger firms have more incentives to voluntary disclose information due to their more diverse set of ownership and therefore disclosure demands. Companies respond to these demand by voluntarily providing more comprehensive and detailed disclosure practices (Zarzeski, 1996; Jaggi and Low, 2000; Hope, 2003; Han et al., 2010, Sanchez et al., 2013). Firm size (Fsize) is in line with prior literature measured by a logarithm of total assets and collected from the Asset4 database (Haniffa and Cooke, 2005; Hooghiemstra et al., 2015)
Cross-listing
Hope (2003) states that the number of cross-listings is positively associated with a company’s voluntary disclosure practices due to the more diverse set of shareholders resulting from the listing (Meek et al., 1995; Jaggi and Low, 2000). Whether the company is cross-listed (Listing) will be measured by a dummy variable, taking the value of 1 when the company is cross-listed and 0 otherwise (Draper and Smith, 2014). Whether a company is cross-listed is collected from the company’s website.
Debt
Companies with higher levels of debt may be more likely to disclose information voluntarily in order to reduce agency costs (Hope, 2003). In a similar vein, Jaggi and Low (2000) state that companies with higher levels of debt are more intensively monitored by creditors to ensure that companies aren’t violating their debt covenants and reduce the chance of potential wealth transfers to shareholders. In order to reduce these agency problems companies may voluntary disclose more information (Meek et al., 1995). The level of debt (Debt) within the organization will be measured by the total amount of debt divided by total assets, collected from the Asset4 database (Zarzeski, 1996).
Profitability
Profitable companies may have more resources available to make their activities known to the public and may moreover, be more willing to disclosure their positive results (Sanchez et al., 2013). Therefore, this study postulates a positive relationship between the profitability of an
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company and the voluntary information published. Profitability (Profit) will be measured as the return on assets, calculated as earnings before interest and taxes divided by total assets, collected from the Asset4 database (Haniffa and Cooke, 2002).
Growth
Fast growing companies are more difficult to monitor due to the increased complexity resulting from their fast growth. This increased complexity will lead to higher levels of information asymmetry and therefore agency problems. As a result, fast growing companies will more likely disclose information voluntarily in order to reduce these agency problems (Sanchez et al., 2013). Growth (Growth) will be measured by the market-to-book ratio calculated as the market capitalization divided by total of assets, collected from the Asset4 database.
Firm industry
Industries such as the mining, oil and energy industry are more publicly vulnerable and will therefore be more likely to disclose information voluntarily (Meek et al., 1995; Gray and Hillier, 2015). Moreover, assuming that companies operating in the same industry will adapt similar patterns of disclosure, this study incorporates the company’s industry in the analysis (Sanchez et al., 2013). A dummy variable will be used to control for the firms industry, stating a value of 1 if the company is active in a specific sector and 0 otherwise (Hooghiemstra et al., 2015). This study includes the following industry sectors; Industrial, Utility, Transportation, Bank/Savings & Loan, Insurance and Other financial. The industry information is collected from the Asset4 database.
Board size
Stating that board size (Bsize) is a measure for board’s effectiveness and therefore for the board’s monitoring and disclosure practices. Moreover, a more diversified board may have more perspectives, skills and knowledge available that may potentially influence a company’s IR practices. The number of board members is recorded at the end of the reporting year as stated in the financial report 2013-2014 and collected from a company’s corporate report.
22 Table 1 Variable Definitions
Description Dependent Variable
IRdisc IRdisc measures whether a company discloses an integrated report. Taking the value of 1 if a company discloses an integrated report and 0 otherwise, based on the Sustainability Disclosure Database of the GRI.
IRscore IRscore measures the degree of a company’s integrated reporting practices based on Serafeim (2015). The score ranges from 0 – 4 . This variable is used as an alternative variable for IRdisc in a sensitivity test.
Independent variables
IND Country-level individualism vs. collectivism based on Hofstede (2001). Taking
the value of 0 (very collectivistic) to 100 (very individualistic).
COLL Country-level individualism vs. collectivism based on House et al. (2004).
Taking the value of 1 (very individualistic) to 7 (very collectivistic). This variable is used as alternative for Hofstede’s individualism in a sensitivity test.
Fsize Company size calculated as the logarithm of a company’s total assets measured in euro’s.
Profit Measured as the return on assets (ROA). Calculated as the earnings before
interest and taxes divided by the total number of assets.
Debt Measured as the leverage between the total level of debt and the total number of
assets.
Growth Measured by the market-to-book ratio. Calculated as the market capitalization
divided by the number of assets.
Bsize Measured by the number of foreign directors.
Listing Measured as 1 if the company has more than one cross-listings and 0 if the company is only listed in its home country.
Industry Ranging from 1 to 6, representing respectively; Industrial, Utility,
Transportation, Bank/Saving & Loan, Insurance and other Financial.
CD High The cultural difference in terms of individualism vs. collectivism between the
foreign directors cultural background and the country where the company’s headquarter is located. Taking the value of zero if the foreign director is more
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collectivistic than the country where the company’s headquarter is located and the absolute value if the foreign director is more individualistic.
CD High Neg The cultural difference in terms of individualism vs. collectivism between the
foreign directors cultural background and the country where the company’s headquarter is located. Taking the value of zero if the foreign director is more individualistic than the country where the company’s headquarter is located and the absolute value if the foreign director is more collectivistic
Interaction 1 The product of the level of individualism (IND) and CD High. Calculated for evaluating the effect of a foreign director on the relationship between the level of individualism and a company’s disclosure practices.
Interaction 2 The product of the level of individualism (IND) and CD High Neg. Calculated for evaluating the effect of a foreign director on the relationship between the level of individualism and a company’s disclosure practices.
Table 1 provides the descriptions and means of measurement of all dependent, independent and control variables including the alternative variables for the sensitivity analysis.
Statistical Analysis
To test the first hypothesis, whether the level of individualism within a country influences the likelihood of voluntarily disclosing an integrated report, this study will use the following formula:
𝐼𝑅𝑑𝑖𝑠𝑐 = 𝑓(𝑙𝑒𝑣𝑒𝑙 𝑜𝑓 𝑖𝑛𝑑𝑖𝑣𝑖𝑑𝑢𝑎𝑙𝑖𝑠𝑚; 𝑐𝑜𝑛𝑡𝑟𝑜𝑙 𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒𝑠) (2)
To test the second hypothesis, whether the highest cultural distance present on a board negatively influences the likelihood of voluntary disclosing an integrated report, this study will use the following research method based on Kogut and Singh (1988) cultural distance model:
𝐼𝑅𝑑𝑖𝑠𝑐 =
𝑓(𝑙𝑒𝑣𝑒𝑙 𝑜𝑓 𝑖𝑛𝑑𝑖𝑣𝑖𝑑𝑢𝑎𝑙𝑖𝑠𝑚; 𝑐𝑢𝑙𝑡𝑢𝑟𝑎𝑙 𝑑𝑖𝑠𝑡𝑎𝑛𝑐𝑒; 𝑖𝑛𝑡𝑒𝑟𝑎𝑐𝑡𝑖𝑜𝑛 𝑡𝑒𝑟𝑚; 𝑐𝑜𝑛𝑡𝑟𝑜𝑙 𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒𝑠) (3)
As mentioned, the measures of cultural distance, CD High and CD High Neg, will be used for testing whether a foreign director negatively influences the company’s likelihood of preparing
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an integrated report. In other words, the level of cultural distance will function as a moderator variable. In order to properly measure this effect, Interaction term 1 and 2 will be introduced (table 1). These Interaction terms consist of a product between the level of individualism (IND) multiplied by CD High and CD High Neg, respectively. With the use of Interaction terms it will be clear whether a more collectivistic, or on the other hand a more individualistic foreign director, influences disclosure practices most significantly.
As stated, when CD High and thereby Interaction term 1 (equation 5) shows a significant result, evidence suggests that a company with a more individualistic foreign director in comparison with the company’s home country influences a company’s disclosure practices. On the other hand, when CD High Neg and thereby Interaction term 2 (equation 6) shows a significant results, evidence suggest that a company with a more collectivistic foreign director in comparison with the company’s home country influences a company’s disclosure practices (hypothesis 2). Equation 4 will be used to test whether the level of individualism in a country influences a company’s disclosure practices (hypothesis 1).
Algebraically: Hypothesis 1: 𝐼𝑅𝑑𝑖𝑠𝑐 = 𝛽0 + 𝛽1𝐼𝑁𝐷 + 𝛽2𝐹𝑠𝑖𝑧𝑒 + 𝛽3𝐿𝑖𝑠𝑡𝑖𝑛𝑔 + 𝛽4𝑃𝑟𝑜𝑓𝑖𝑡 + 𝛽5𝐷𝑒𝑏𝑡 + 𝛽6𝐺𝑟𝑜𝑤𝑡ℎ + 𝛽7𝐼𝑛𝑑𝑢𝑠𝑡𝑟𝑦 + 𝛽8𝐵𝑠𝑖𝑧𝑒 + 𝜀 (4) Hypothesis 2: Interaction 1: 𝐼𝑅𝑑𝑖𝑠𝑐 = 𝛽0 + 𝛽1𝐼𝑁𝐷 + 𝛽2𝐹𝑠𝑖𝑧𝑒 + 𝛽3𝐿𝑖𝑠𝑡𝑖𝑛𝑔 + 𝛽4𝑃𝑟𝑜𝑓𝑖𝑡 + 𝛽5𝐷𝑒𝑏𝑡 + 𝛽6𝐺𝑟𝑜𝑤𝑡ℎ + 𝛽7𝐼𝑛𝑑𝑢𝑠𝑡𝑟𝑦 + 𝛽8𝐵𝑠𝑖𝑧𝑒 + 𝛽9𝐶𝐷 𝐻𝑖𝑔ℎ + 𝐼𝑛𝑡𝑒𝑟𝑎𝑐𝑡𝑖𝑜𝑛 1 + 𝜀 (5) Interaction 2: 𝐼𝑅𝑑𝑖𝑠𝑐 = 𝛽0 + 𝛽1𝐼𝑁𝐷 + 𝛽2𝐹𝑠𝑖𝑧𝑒 + 𝛽3𝐿𝑖𝑠𝑡𝑖𝑛𝑔 + 𝛽4𝑃𝑟𝑜𝑓𝑖𝑡 + 𝛽5𝐷𝑒𝑏𝑡 + 𝛽6𝐺𝑟𝑜𝑤𝑡ℎ + 𝛽7𝐼𝑛𝑑𝑢𝑠𝑡𝑟𝑦 + 𝛽8𝐵𝑠𝑖𝑧𝑒 + 𝛽9𝐶𝐷 𝑁𝑒𝑔 + 𝐼𝑛𝑡𝑒𝑟𝑎𝑐𝑡𝑖𝑜𝑛 2 + 𝜀 (6)
The descriptive statistics regarding the dependent variable IR disclosure per country are shown in table 2. The mean of IRdisc is 0.28, implying that approximately a quarter of the total sample discloses an integrated report. The mean may however be skewed as a results of the
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disclosure of integrated reports in Denmark and the United Kingdom. The descriptive statistics regarding the independent and control variables are shown in table 3. The average score of individualism vs. collectivism (IND) is 75.94 implying a relatively high level of individualism. Furthermore, as stated, the lowest level of individualism is 63, implying that there are only individualistic countries included in the sample. Moreover the measures of cultural distance are 4.78 and 11.83 for CD High and CD High Neg, respectively. Suggesting that the difference for more collectivistic foreign directors is higher than more individualistic foreign directors.
Table 2
Descriptive Statistics Dependent variable IRdisc
Country N Mean SD Min Max
Germany 50 .16 .37 .00 1.00 France 50 .70 .46 .00 1.00 Sweden 20 .15 .36 .00 1.00 Denmark 10 .00 .00 .00 .00 Finland 10 .70 .48 .00 1.00 Norway 10 .20 .42 .00 1.00 Netherlands 30 .30 .47 .00 1.00 United Kingdom 68 .00 .00 .00 .00 Total 248 .28 .32 .00 1.00
Table 2 provides the descriptive statistics of the dependent variable, IRdisc, whether a company discloses an integrated report or not, taking the value of 1 if a company discloses an integrated report and the value of 0 otherwise.
A correlation matrix between the dependent and independent variables is provided in table 4. Where a Pearson correlation between two variables above 0.7 would be an indication of possible multicollinearity problems. Because the highest score, between the variables growth and profit is r =.57, there is no reason to suspect multicollinearity. However, in order to be certain and use a more reliable measure for testing multicollinearity, the Variance Inflation Factor (VIF) for each variable is calculated by means of a linear regression. Where a VIF score above 10 is a sign of multicollinearity. In this study, where the highest score was 1.8 and 1.3 being the average VIF score, there are therefore no concerns for multicollinearity issues.
26 Table 3
Descriptive Statistics Independent and control variables
Variable Mean SD Min Max
IND 75.94 8.96 63.00 89.00 Log Fsize 7.05 .74 5.49 9.15 Profit .07 .79 -.19 .34 Debt .23 .16 .00 .72 Growth 1.02 .08 .00 .34 Bsize 11.54 4.14 3.00 23.00 Listing .21 .41 .00 1.00 Industrial .75 .43 .00 1.00 Utility .04 .21 .00 1.00 Transportation .04 .04 .00 1.00
Bank/Savings & Loan .05 .22 .00 1.00
Insurance .04 .18 .00 1.00
Other Financial .08 .27 .00 1.00
CD HIGH 4.78 8.15 .00 28.00
CD HIGH NEG 11.83 18.50 .00 75.00
Table 3 provides the descriptive statistics regarding the independent and control variables. IND is the country level of individualism according the Hofstede (2001). Fsize is the natural logarithm of a company’s total assets measured in euro’s. Debt is measured as the leverage between the total level of debt divided by the total number of assets. Profit equals the company’s ROA and will be measured as the earnings before interest and taxes divided by the total number of assets. Growth equals the market-to-book ratio measured as the market capitalization divided by the number of total assets. Bsize is the number of board members present on a company’s BoD. Listing is measured as 1 if the company is cross-listed and 0 if the company is only listed in its home country. Industrial, Utility, Transportation, Bank Savings & Loan, Insurance and other Financial are 1 if the company is active in the particular industry and 0 otherwise. CD High is the level of cultural distance measured as 0 if the foreign director is more collectivistic than the country where the company’s headquarter is located and measured as the absolute value when the foreign director is more individualistic. CD High Neg is the level of cultural distance measured as 0 if the foreign director is more individualistic than the country where the company’s headquarter is located and measured as the absolute value when the foreign director is more collectivistic.
27 Tab le 4 Cor re lation M a tr ix 1 2 3 4 5 6 7 8 9 10 11 12 1 3 14 15 16 1 I R di sc 1.00 2 I N D -.35 ** 1.00 3 C D H ig h .15* -.43 ** 1.00 4 C D H ig h N eg -.14 .24 ** -.37 ** 1.00 5 Fsi ze .18 ** -.23 ** .07 0.11 1. 00 6 D ebt .10 -.13 ** .00 -.07 .10 1.00 7 G row th -.08 .36 ** -.18 ** .07 -.03 -.29 ** 1.00 8 Prof it .00 .21 ** -.13 ** -.01 .04 -.11 .57 ** 1.0 0 9 B si ze .15 * -.37 ** .12 .00 .54 ** .03 -.14 * -.03 1.00 10 Lis ting -.15 .04 -.03 .21 ** .29 ** .03 -.00 -.02 .06 1.00 11 Indust rial .02 -.02 .12 -.07 -.07 .11 -.06 .01 .02 -.05 1.00 12 U til ity .19 .05 -.13 ** .08 .08 -.0 1 .08 .07 .02 .13 * -.3 8** 1.00 13 Tra nspor ta tion .03 -.08 .11 -.04 .05 .00 -.06 .00 .07 .00 -.34 ** -.04 1.00 14 B ank /S & L .04 .02 .08 -.10 .07 -.10 -.08 -.07 -.05 -.03 -.39 ** -.04 -.04 1.00 15 Insur anc e .08 -.05 -.03 .07 .03 -.11 .11 .03 .04 .06 -.34 ** -.04 -.04 -.04 1.00 16 O the r f inan ci al -.07 .06 -.04 .11 -.06 -.00 .02 -.03 -.09 -.05 -.52 ** -.06 -.06 -.07 -.06 1.00 Ta b le4 p resen t th e co rr ela tio n ma tr ix w ith * *, * i nd icatin g t hat th e val ue sig nif ican tly d iff er s f ro m ze ro at th e 0.0 1, 0.0 5 lev els, resp ec ti vel y.
29 4. Results
The section discusses the results of the analysis and provides evidence whether the hypothesis can be accepted or not.
Table 5 Binary Regression
Variables Model 1 Model 2 Model 3 Model 4
Intercept -2.84 5.74 .30 .45 Fsize .55** .56** .42** .41** Debt -.29 -.69 -.12 -.05 Profit 1.48 2.45 .20 .18 Growth -.28 -.03 -.03 -.20 Bsize .22 -.04 -.16 -.22 Listing .37 .19 .19 .24 Industrial -.63 -.55 -.56 -.65 Utility .73 .83 .85 1.15 Transportation -.76 -.56 -.61 .69 Bank/S&L -.85 -.89 -.90 -1.11 Insurance -1.54 -1.17 -1.14 -1.24 IND (H1) - -.12*** -1,11*** -1.19*** CD High - - -1.12 - CD High Neg - - - .25* Interaction1 (H2) - - -.10 - Interaction2 (H2) - - - -.39* N 248 248 248 248 R^2 .02 .10 .09 .11 F-test 1.49 3.26 2.83 3.10
Table 5 present the results based on a binary logistic regression. All models are in relationship with the dependent variable. Note: ***, **, * indicate significantly different from zero at the 0.01, 0.05, and 0.10 levels, respectively. Fsize is the natural logarithm of a company’s total assets measured in euro’s. Debt is measured as the leverage between the total level of debt divided by the total number of assets. Profit equals the company’s ROA and will be measured as the earnings before interest and taxes divided by the total number of assets. Growth equals the market-to-book ratio measured by the market capitalization divided by the number of total assets. Bsize is the number of board members present on a company’s BoD. Listing is measured as 1 if the company is cross-listed and 0 if the company is only listed in its home country. Industrial, Utility, Transportation, Bank Savings & Loan and Insurance are 1 if the company is active in the particular industry and 0 otherwise. IND is the level of individualism vs. collectivism according to Hofstede (2001). CD High is the level of cultural distance measured as 0 if the foreign director is more collectivistic than the country where the company’s headquarter is located and measured as the absolute value when the foreign director is more individualistic. CD High Neg is the level of cultural distance measured as 0 if the foreign director is more individualistic than the country where the company’s headquarter is located and measured as the absolute value when the foreign director is more collectivistic. Interaction 1 is the moderator variable used in model 3, measured as the product of the level of individualism (IND) and CD High. Interaction 2 is the moderator variable used in model 4, measured as the product of the level of individualism (IND) and CD High Neg.
