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Master Thesis
Organizational & Management Control
‘The influence of national culture and legal systems
on the relationship between liquidity and performance’
Janieke Golbach
WA Scholtenstraat 11a
9711 XA Groningen
s1637916
06-18296615
janiekegolbach@hotmail.com
November 26th 2012
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Abstract
In times of internationalization and worldwide competition, multinational companies deliver a substantial contribution to the economy. In the field of research about multinationals culture plays an important role. But also working capital management techniques, which are crucial in maximizing organizational performance, are a well research subject. In this study these subjects are combined and the influence of culture on the relation between liquidity and performance is researched. Due to empirical quantitative analyses, there is found a negative relation between the cash conversion cycle (as measure for liquidity) and return on equity (as measure for performance). This relation is stronger in countries that have higher uncertainty and it is stronger in countries with a common law system.
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1. Introduction
The business world is globalizing and more firms are seeking for opportunities outside their domestic borders. Nowadays there are more than 63.000 multinationals with 821.000 subsidiaries spread all over the world. Together they produce 25 percent of the world’s gross product (Gabel and Bruner, 2003). Multinational organizations offer a substantial contribution to the world economy. With respect to multinationals, the concept of culture has proven to be an interesting research subject of which the results can be very useful to managers in organizing their business to maximize performance. One of the possibilities to maximize performance is to have an efficient working capital management, because working capital virtually affects the firms overall profitability, solvency and liquidity (Attari and Raza, 2012).
This research focuses on the influence of culture on the relationship between liquidity and performance. Previous research has shown that there exists a relationship between capital structure and performance (Gleason et al., 2000; Chou and Lee, 2010). Liquidity is an important part on the assets side of the capital structure of a firm and can be measured by the cash conversion cycle (CCC). Attari and Raza (2012) state that the length of the CCC is considered among the fundamental ingredients of working capital management. And due to the large influence of working capital management practices on performance is a crucial ingredient. Research shows that there is a negative relation between the CCC and performance of a firm. This means the shorter the CCC, the higher the performance (Jose et al., 1996; Wang, 2002; Eljelly, 2004; Hutchison et al., 2007; Attari and Raza, 2012).
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relationship between liquidity and performance. This has been done by the following research question:
How does culture influence the relation between liquidity and performance of an organization?
The goal of this research is to contribute to the understanding of the relation between culture, liquidity and performance and to give an insight in how particular working capital management practices can be addressed to different cultural dimensions, in order to achieve the higher organizational goal of maximizing performance. This research can be especially relevant to managers of multinational and culturally diverse organizations. There have been some previous studies on this topic, but most research have lacked a cross country comparison as data from one country was used (Ebben and Johnson, 2011) and thereby only one dimension of culture (Ramirez and Tadesse, 2009) or no separation of the different cultural dimensions was presented (Gleason et al., 2000). Moreover, often the CCC as a whole has been tested, while the different parts are neglected (Jose et al., 1996). Acknowledging these limitations of the current literature, this study focuses on three cultural dimensions (the ones that are most relevant according to the literature), three countries to execute a cross country comparison and data from a time period of 5 years. Also, the separate parts of the CCC in relation with performance will be tested. Finally, the influence of the legal system of a country, as a controlling variable against national culture, is included.
The research has been approached by a statistical analysis of the influence of liquidity on performance with the inclusion of different culture variables. The data was collected from more than 2200 companies in the United States, Japan and France over the period of 2006-2010.
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2. Literature review
In order to be able to answer the research question (‘How does culture influence the relation between liquidity and performance of an organization?’), the most important concepts (culture, liquidity, performance, legal system) will be defined and explained in the following literature review. Based on these concepts and their underlying relationships and theories, several hypotheses and expected relations will be stated.
2.1 Performance
Performance systems are used within organizations for the monitoring and evaluation of the performance of different areas of business, usually by comparing actual performance with the targets (Westerman et al., 2010). However, measuring performance is also needed to compare the company with competitors.
McGee et al. (2005) indicate three perspectives of performance; financial performance, operations performance and organizational effectiveness. Financial performance assumes the dominances of financial goals and is associated with accounting based or financial market based measures. Operational performances focus on internal performance factors which might lead to success for the company and its set of businesses. These included market position, growth, market share, efficiency, value added in manufacturing or product quality. Organizational effectiveness goes beyond economic and operational performances and focuses on the strategic goals of the entire firm and creates value for all stakeholders. A properly fitted strategy is therefore highly important.
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In this research the focus is on financial performance. Managers and analysts use accounting earnings and accounting profits as a benchmark because financial accounts are readily available and the measures themselves are easy to calculate (McGee et al., 2005). These measures are also used in external reporting. Due accounting measures, there is an objective way of evaluating, which makes comparison with other companies easier (Westerman et al., 2010).
Evaluation of financial performance can be done in different areas. One possibility is due to operating performance, for example profitability or return on assets, as has been done in research of Wang (2002) and Deloof (2003). Or it can be done based on corporate value, for example, return on equity, as has been done in Wang (2002).
In this research, performance will be evaluated based on corporate value, especially the return on equity, and operating performance, especially by the return on assets, which has also been done by Jose et al. (1996). The major difference between these two types of methods is the influence of the capital structure, which is only visible in the return on equity (Jose et al., 1996). Because the expected influence of culture on the capital structure of a firm, both measurements, return on equity and return on assets, will be used in this study.
2.2 Liquidity
Liquidity refers to the ease and rapidity with which assets can be converted into cash, without significant loss in value. The more liquid a firm’s assets, the less likely the firm is to experience problems meeting short-term obligations. Thus, the probability that a firm will avoid financial distress can be linked to the firm’s liquidity (Hillier et al., 2010). Due to its direct influence on the organizational state of being, liquidity can be seen as an important variable in evaluating the total organizational performance.
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operating cash inflows and outflows is provided by a firm’s cash reserve investments in combination with its unused borrowing capacity rather than by total current asset coverage of outstanding current liabilities. This could potentially lead to the misinterpretation of a firm’s liquidity position. To overcome this problem, the cash conversion cycle (CCC) is often used today. The CCC is an ongoing liquidity management measure and includes the operational cycle and excludes the time element of its cash outflows. Its application will assure the proper amount and timing of funds available to meet a firm’s liquidity needs (Richard & Laughlin, 1980; Jose et al., 1996). It combines both balance sheet and income statement data in order to create a measure with a time dimension (Jose et al., 1996).
The cash conversion cycle is the net time interval between actual cash expenditures on a firm’s purchase of productive resources and the ultimate recovery of cash receipts from product sales, established the period of time required to convert a dollar of cash disbursement back into a dollar of cash inflow from a firm’s regular course of operations (Richard & Laughlin, 1980). In other words, it measures the number of days that funds are committed to inventories and receivables, minus the number of days that payment to suppliers is deferred (Gentry et al., 1990).
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Figure 2.1: Cash Conversion Cycle (taken from Jose et al., 1996)
If a shorter CCC is wanted, the collection period and the inventory conversion period need to be decreased while the credit period should be increased. However, if a longer CCC is desired, the collection period and the inventory conversion period need to be increased while the credit period is decreased. In general, a longer CCC will produce a larger required commitment to cash and non-cash, current asset investments and a less extensive relative ability to finance these investments with current liabilities (Richards and Laughlin, 1980).
2.3 Liquidity and performance
Attari and Raza (2012) state that having an efficient working capital management, which includes liquidity management, is one of the possibilities to maximize performance. Working capital management affects the firm’s overall profitability, solvency and liquidity. Knowledge on factors that influence performance and their causal relationships can be of great importance in reaching the overall organizational goal of maximizing performance.
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is not driven by size (Jose et al., 1996). Wang (2002) confirms this relation and states that an aggressive liquidity management leads to higher corporate values. Deloof (2003) found that by reducing the collection period and the inventory conversion period the corporate profitability can be increased. Organizations with high liquidity are waiting longer to pay their bills, which indicate a positive relation between the performance and the credit period. Also the studies of Eljelly (2004) and Hutchison et al. (2007) found a negative relation between liquidity levels/CCC and profitability.
Ebben and Johnson (2011) state that effective working capital management increases returns by reducing the costs of capital and by allowing firms to achieve higher levels of asset turnover. Reducing the days of inventory and the days of receivables (and thereby creating a shorter CCC) have a positive impact on the return on assets. Firms that have a longer CCC will have larger working capital investments and will therefore be more cash constrained.
Attari and Raza (2012) state that there is a positive relationship between the length of CCC and the profitability of firms in terms of return on assets. This is a strong indication to the firm managers that the longer the CCC, the less capital will be deployed in current assets and eventually there will be more capital investment leading towards a higher profitability. They indicate that there is a negative relation between CCC and return on equity. A shorter CCC period eventually results in a high profitability of the firm because due to the efficient working capital management practices the costs of using the funds are decreased.
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The results of this literature review lead to the following hypotheses concerning the relationship between liquidity (CCC) and performance (ROE/ROA).
Hypothesis 1: There is a negative relation between CCC and firm performance
Hypothesis 1A: There is a negative relation between the days in the collection period and firm performance
Hypothesis 1B: There is a positive relation between the days in the credit period and firm performance
Hypothesis 1C: There is a negative relation between the days in the inventory conversion period and firm performance.
2.4 Culture
National culture has been an important influencing factor in many studies in the field of finance, accounting, psychological and social literature. Different definitions, dimensions and measurements are used in defining the concept of national culture. For example, the research of Hofstede (1980), Trompenaars and Hampden-Turner (1998), Hall and Hall (2011) and the GLOBE study have made important statements about the definition of culture (Scheffknecht, 2011).
Hofstede (1980) states that culture is based on values, which are broad tendencies to prefer certain states of affairs over others. These values form the core elements in culture (Hofstede, 1980; McSweeney, 2002). Hofstede identities five dimensions to operationalize culture; individualism, uncertainty avoidance, masculinity, power distance and long-term orientation. Differences in national culture can be made clear based on the scores on these dimensions (Hofstede, 1980; Hofstede, 1993).
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organizational challenge. Managing people from different cultures is crucial. He identifies seven continues that characterize the dilemmas that need reconciliation; universalism-particularism, individualism-communitarianism, neutral-affective, specific-diffuse, achievement-ascription, sequential-synchronic and internal-external control (Bickerstaffe, 2002).
Hall and Hall (2011) developed a cultural model that emphasized the importance of nonverbal signals and modes of awareness over explicit messages. These insights proved highly valuable in studying how members of different cultures interact and how they often fail to understand one another. Hall and Hall (2011) define high and low context cultures and use a time and space dimension for cultural differences (Scheffknecht, 2011).
The GLOBE study state that there exist nine cultural dimensions. Each of them is presented in two variants; society as it is and society as it should be, according to the respondents. These dimensions are; in-group collectivism, uncertainty avoidance, future orientation, institutional collectivism, gender egalitarianism, power distance, performance orientation, humane orientation and assertiveness. The GLOBE study is partly based on the methodology of Hofstede and therefore many similarities exist (Minkov and Blagoev, 2012).
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studies. Based on the previous arguments, the Hofstede dimensions are used to operationalize national culture in this research.
As stated above, Hofstede identifies five dimensions; individualism, uncertainty avoidance, masculinity, power distance and long-term orientation (Hofstede 1980, 1993). Individualism refers to the degree people in a country prefer to act as individuals rather than as member of a group. In societies with high individualism the ties between individuals are loose and individuals are expected to take care of themselves and their direct families only. In collectivistic societies there is a tight framework in which individuals can expect their relatives or members of the same group look after them in exchange for unquestioning loyalty.
Uncertainty avoidance is the degree to which people in a country feel comfortable or threatened with uncertainty and ambiguity. Societies with high uncertainty avoidance have rigid codes of belief and behavior and are intolerant of unorthodox behavior and ideas. In low uncertainty avoidance societies there is a more relaxed attitude in which practices counts more than principles.
Masculinity is the degree to which tough values like assertiveness, performance, heroism and material reward for success are represented. A masculine society is more competitive. While a feminine society is more consensus oriented and values like cooperation, modesty, care for the weak and quality of life are more important.
Power distance is the degree of inequality among people which the population of a country considers normal. In other words, the extent to which the less powerful members of organizations within a country expect and accept that power is distributed unequally. In societies with high power distance hierarchical order is accepted. In societies with low power distance people want to equalize the distribution of power.
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For this research three countries will be used; the United States (US), Japan and France. They have different scores on the five culture dimensions which makes comparison interesting. The exact scores (see figure 2.2 and table 2.1) and further explanation can be found below.
The US scores low on power distance. They focus on equal rights. Hierarchy is established for convenience, superiors are always accessible and managers rely on individual employees and teams for their expertise. Information is shared frequently and communication is informal, direct and participative. The US has a very individualistic culture. Employees are expected to be self-reliant and display initiative. Promotion decisions are based on evidence or merit. The US is uncertainty accepting. There is acceptance for new ideas and innovative products and they do not require a lot of rules. The US is a masculine society. Competition is high and people talk freely about successes and achievements. Conflicts are solved individual and the goal is to win. Finally the US is short-term oriented country. Results are short-term based and there is a focus on tradition and fulfilling social obligations (http://geert-hofstede.com/countries.html).
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France scores high on power distance. The power is highly centralized and the attitude towards managers is more formal. The information flow is hierarchical and information is controlled with power (unequally distributed). France also scores high on individualism. They favor individual and private opinions. The relationship with work is contract based, the focus is on the task and autonomy is favored. The communication is direct and everyone is allowed to speak up. The management is focused on the individuals and individual work recognition is expected. They also score high on uncertainty avoidance. Certainty is reached through academic work. In management rules and security are present and if lacking, it creates stress, even as changing policies. France is relative feminine country. They care for the quality of life, competition amongst colleagues is not favored and the management is supportive and conflicts are solved with dialogue. Finally France is a short-term oriented society. It focuses on quick results. Consumption is driven by immediate gratification and is sensitive to social trends and rituals. Management is based on self-reliance, personal achievement, hard work and managers are judged on short-term results (http://geert-hofstede.com/countries.html).
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US Japan France
Individualism 91 46 71
Uncertainty avoidance 46 92 86 Long-term orientation 29 80 39
Table 2.1: The scores of the three countries on the Hofstede dimensions
While all cultural dimensions are always present, they do not all influence the liquidity of a firm. It can be said that culture is shared but also situational. In daily life, not all five dimensions are used in every situation. Masculinity and power distance are helpful in explaining other business practices such as differences in organizational structures, but do not have a clear theoretical implication for liquid asset holding, debt ratios and capital structure (Ramirez and Tadesse, 2009; Ramirez and Kwok, 2009). Also the scores on power distance (see figure 2.2 above) differ not that much, which leads to the expectation that the results will not be substantial different. Therefore the focus of this research is on the dimensions individualism, uncertainty avoidance and long-term orientation.
2.5 Culture and liquidity-performance relation
Culture has proven to be a broad influencing factor on many organizational facets, for example on management control systems (Harrison and McKinnon, 1999; Efferin and Hopper, 2007; Jansen et al., 2009) and organizational design and structure (Harrison et al., 1994; Ramirez and Kwok, 2009), as well as on the capital structure and liquidity (Gleason et al., 2000; Ramirez and Tadesse, 2009; Ramirez and Kwok, 2009). This may lead to different management practice preferences in different countries under the influence of different cultures.
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levels to maximize success and enhance their personal reputations. Due to the individualistic orientation of managers, their focus on personal results and achievements and their independence of others, the expectation is that all kinds of debt (liquidity can be seen as negative debt) remain low. This leads to the expectation that there is a negative relation between individualism and the CCC. This means that firms in more individualistic countries have a shorter CCC and thus higher liquidity. Due to the individualism, managers in organizations inclined to focus on their own success, which means maximizing their own performance. The focus is on collecting the money and less on the payment to suppliers. In other words, collecting their money fast (a relatively short collection and inventory conversion period), while waiting with the payment of others (a relative long credit period). This indicates a stronger relationship between the collection period and inventory conversion period and performance in individualistic countries and a weaker relationship between the credit period and performance in individualistic countries. This will be tested according to the following hypotheses.
Hypothesis 2: The relationship between CCC and performance is stronger in countries that are more individualistic
Hypothesis 2A: The relationship between the collection period and performance is stronger in countries that are more individualistic
Hypothesis 2B: The relationship between the credit period and performance is weaker in countries that are more individualistic
Hypothesis 2C: The relationship between the inventory conversion period and performance is stronger in countries that are more individualistic
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risk averse managers should hold higher levels of liquid assets (Ramirez and Tadesse, 2009; Chang, 2009). Gleason et al. (2000) also stated that there is a positive relation between uncertainty avoidance and CCC. Firms from highly uncertainty avoidance cultures are less willing to take the risk of stock outs due to a short inventory conversion period and potentially loose sales due to short credit period. This means that companies in a country with higher uncertainty avoidance have a stronger relationship between the collection period, credit period and the inventory conversion period and performance, because they want to keep their liquidity high, they do not want to lose potential sales and they do not want to risk stock outs. This leads to the following hypotheses.
Hypothesis 3: The relationship between the CCC and performance is stronger in countries that have higher uncertainty avoidance
Hypothesis 3A: The relationship between the collection period and performance is stronger in countries that have higher uncertainty avoidance Hypothesis 3B: The relationship between the credit period and performance is
stronger in countries that have higher uncertainty avoidance Hypothesis 3C: The relationship between the inventory conversion period and
performance is stronger in countries that have higher uncertainty avoidance
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performance is stronger in countries that are more short-term oriented. This will be tested according to the following hypothesis.
Hypothesis 4: The relationship between CCC and performance is stronger in countries that are more short-term orientated.
Hypothesis 4A: The relationship between the collection period and performance is stronger in countries that are more short-term orientated.
Hypothesis 4B: The relationship between the credit period and performance is weaker in countries that are more short-term orientated.
Hypothesis 4C: The relationship between the inventory conversion period and performance is stronger in countries that are more short-term orientated.
2.6 Legal system
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In general, legal systems can be divided into two categories; civil law and common law. Civil law is based on the law system in the Roman Empire. Laws and rules are clearly, completely and coherently stated and there is no need for judges to deliberate publicly about which laws, customs and past experiences apply to new, evolving situations. There is a high degree of procedural formalism to reduce the discretion of judges. A critique is that the excessive judicial formalism may not allow judges sufficient discretion to apply laws fairly to changing conditions and therefore not support evolving commercial needs (Menard and Shirley, 2005).
Common law is based on the English law, developed since the seventeenth century. It typically imposes less rigid and formalistic requirements. Judges have a broad interpretation power and laws can be created in court as circumstances change rather than adhering to the logical principles of codified law. It is based on experience, whereas civil law is based on rules and logic (Menard and Shirley, 2005).
The most important difference between civil and common law, according to the law and finance view, is the difference in protecting the rights of private investors relative to the rights of the state. Private property rights protection forms the foundation for financial development. Also the ability to adjust to changing circumstances is an important determining factor for the financial needs and development of an economy. Civil law countries will have weaker property rights protection and lower levels of financial development than countries with other legal systems. Also the adaptability in civil law (especially of French legal origin) countries is lower which means that they have a lower probability of developing efficiently flexible financial systems than common law countries and civil law countries (from German legal origin) (Menard and Shirley, 2005).
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2.7 Legal system and liquidity-performance relation
The influence of the country’s legal system on shareholder rights and thereby indirect on the capital structure of firms can be an influencing factor on the relationship between liquidity and performance.
Chang (2009) states that managers in countries with the absence of sufficient shareholder protection rights prefer to hold cash rather than dispersing it among their shareholders. Managers in common law countries (with stronger shareholder protection rights) tend to keep less cash and other liquid assets. In countries with strong private property rights protection (common law) firms tend to reinvest their profits, but where property rights are relatively weakly enforced, entrepreneurs are less inclined to invest the retained earnings (Menard and Shirley, 2005). This will be confirmed by McLean et al. (2012) who state that investor protection laws encourage efficient investment. Chang (2009) state that in countries with poor shareholder protection rights organizations hold higher cash levels which can be easily invested in value-reducing investments with little or no scrutiny from their shareholders.
Due to efficient reinvestment of cash in the firm the overall performance and value of the firm will be higher. Reinvesting the profits leads to a higher (starting) cash balance. Efficient use of the CCC maximizes cash generation for the business, which means better performance and more growth developments (Reider, 2010).
In common law countries, where the shareholder rights are stronger and reinvestment of profits is more common and efficient, there is more focus on the CCC to generate cash and thereby generate a higher performance. In other words, the relationship between CCC and performance is expected to be stronger in common law countries than in civil law countries. This will be tested according to the following hypothesis.
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2.8 Overview
In figure 2.3 an overview of the concepts, their underlying relations and the proposed hypotheses can be found.
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3. Method
Based on the research question ‘How does culture influence the relation between
liquidity and performance of an organization?’ this study can be marked as an
explanatory study. An explanatory study goes beyond description and attempts to explain the reasons for the phenomenon that the descriptive study only observed. The hypotheses are tested to explain the proposed relationships. An explanatory study often answers a ‘how’ question. (Cooper and Schindler, 2008). Here the influence of culture, an explaining factor, on the relation between liquidity and performance, the phenomenon, is tested.
The main concepts, which have been explained in the literature review in the previous chapter, can be clearly and objectively measured. Due to the large amount of available data on these concepts in organizations and the possibility of quantitative measurability, a quantitative study seems to be the best fit to answer the research question.
Empirical data about liquidity and performance is obtained from Orbis, a global company data base with financial data from balance sheets and income statements of companies all over the world. The data on culture is conducted from the Hofstede studies (Hofstede, 1980; Hofstede, 1993; http://www.geert-hofstede.com)
These data are the input of the statistical analysis, which will be executed to indicate the strength of the causal relationships.
To perform this research first the different concepts (culture, performance, cash conversion cycle (CCC)) will be operationalized, then the data collection is executed and finally the statistical analyses with their assumptions are introduced.
3.1 Concept operationalization
3.1.1 Countries
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development is relatively similar. This is relevant because large differences in economic development could lead to deviating results, in which other factors (for example large growth rates) outside of culture can be explanatory. Besides the scores of these countries on the three cultural dimensions differ (see table 3.2). The US and Japan are often at one end whereas France is found in the middle. This allows us to test if there is a linear relationship between culture and CCC and performance, thus if the relation between CCC and performance is stronger when the culture is, for example, more individualistic.
2006 2007 2008 2009 2010
US 44.623 46.349 46.760 45.192 46.702
Japan 34.102 37.972 39.473 43.063 45.903
France 35.467 40.342 43.992 40.477 39.170
Table 3.1: GDP per capita in US dollar
(Source: World Bank national accounts data and OECD National Accounts data files)
US Japan France
Individualism 91 46 71
Uncertainty avoidance 46 92 86 Long-term orientation 29 80 39
Table 3.2: Scores on the Hofstede dimensions (Source: www.geert-hofstede.com)
3.1.2 Performance
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3.1.3 Liquidity
The liquidity is measured by the CCC. This is calculated as the collection period plus the inventory conversion period minus the credit period. The collection period measures the average number of days from the sales of goods to the collection of the resulting receivables (account receivable/sales x 365). The credit period measures the average length of time between the purchase of goods and the payment of them (account receivables/costs of goods sold x 365). The inventory turnover measures the length of the average time between the acquisition and the sale of products (365/inventory turnover). All the periods are measured in number of days. The scale can range from eternity negative to eternity positive. These three measures can be extracted separately for the database Orbis. Together they form the CCC.
3.1.4 Culture
Culture is measured by the Hofstede scores as indicated above in table 1 and 3. Only the dimensions individualism, uncertainty avoidance and long-term orientation are investigated here. The dimensions are used as dummy variables, where a low score on a dimension is 0 and a high score on a dimension is 1. The dummy variables can be found below in table 4.
US Japan France
Individualism 91 (high=1) 46 (low=0) 71 (high=1) Uncertainty avoidance 46 (low=0) 92 (high=1) 86 (high=1) Long-term orientation 29 (low=0) 80 (high=1) 39 (low=0)
Table 3.3: Hofstede scores and dummy variables
3.1.5 Legal system
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3.1.6 Control variables
Size will be used as a control variable. Size can influence the liquidity of an organization. Larger firms tend to be more profitable, have a higher ROA and ROE and tend to have a shorter CCC. Size will be measured by the log of total net sales, which is measured in thousands of Euros. Log sales (LS) will be used as a means of obtaining a normal distribution (Ebben and Johnson, 2011). Log sales will be measured in Euros and vary from zero Euros till eternity.
An overview of the different variables and their notation can be found below in table 3.4. The abbreviations are used in the rest of the tables. The first part variable is the name of the measure, followed by the year in which it is measured. For example, ROE06 means the return on equity in 2006.
Variable Measure
Independent Performance Return on equity (ROE) Return on assets (ROA) Dependent Liquidity Cash Conversion Cycle (CCC)
Collection period (COP) Credit period (CRP)
Inventory conversion period (ICP) Culture
Legal system
Individualism (IND)
Uncertainty avoidance (UA) Long-term orientation (LTO)
Common law Civil law
Control Size Sales (LS)
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3.2 Sample
3.2.1 Firms
To study the influence of the legal system equally, only listed firms are selected. The influence of the legal system is mostly due to the shareholder rights that differ between the two types of legal system. To measure the influence of the legal system, firms at least have to have shareholders. To make sure this is the case, only listed firms are selected.
3.2.2 Industry
Only organizations that operate in the manufacturing industry are used. The relationship between CCC and ROA/ROE is very sensitive to factors such as capital intensity, product durability, production process, channels of marketing and competitive forces (Jose et al., 1996). To exclude these effects, only data for companies in the manufacturing industry are used.
3.2.3 Period
The research is conducted with accounting data of a time period of five years. The model is tested for each year separately. Results are compared to see if the conclusion holds for several years and therefore make them more generalizable for the longer time period. Balances and income statements from 2006-2010 have been used.
3.3 Statistical analysis
3.3.1 Assumptions
To test the hypotheses, linear regression analyses will be used. Before carrying out regression analysis, several assumptions have to be met; linear correlation, normal distribution, no multicollinearity and no heteroscedasticity of the variances.
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2011; Field, 2005). All values that differ more than 3.3 standard deviations of the mean, the organization will be removed from the data set.
A linear correlation can be tested by executing a scatter plot and by performing correlation analysis. This correlation analysis can be done by generating correlation tables in Eviews or test bivariate correlation in SPSS. This way the correlation between the dependent and independent variables can be shown.
Normal distribution can be examined by the skewness and kurtosis or a normal probability plot (P-P plot) or histogram. The skewness is a measure of asymmetry of the distribution of the series around its mean. The skewness of a symmetric distribution is zero. Kurtosis measures the peakedness or flatness of the distribution of the series. The kurtosis of a normal distribution is 3 (Brooks, 2008; Huizingh, 2006). Based on previous experience and the opinion of fellow researchers, for this research the margins for a normal distribution are skewness between -1 and 1 and a kurtosis between 2 and 4.
Multicollinearity implies that the explanatory or independent variables are correlated with each other. This results in a high correlation between the explanatory variables, which result in unreliable outcomes. Multicollinearity will be tested by testing correlations in Eviews or bivariate correlations in SPSS. For this research the reference is that if there is a correlation higher than ρ=0.9 multicollinearity will be a problem and the variables will be investigated within two different regression models (Pallant, 2010).
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3.3.2 Analysis
All the hypotheses will be tested with linear regression analysis to see if there is a relationship between the CCC and performance. An overview of the executed regression models can be found in table 6 below. The results of the regressions for the different countries are compared in order to see in which country or for which cultural dimensions the relationships are the strongest. Also the coefficients are tested in a new, overall regression that indicates if there are significant differences between the coefficients. All tests are executed using both Eviews and SPSS. A significance level of 0.05 or higher will be used.
3.3.3 Expected results
31 Model Hypotheses Regression
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 H1, H2, H3, H4, H5 H1, H2, H3, H4, H5 H1, H2, H3, H4, H5 H1, H2, H3, H4, H5
H1a, H2a, H3a, H4a
H1a, H2a, H3a, H4a
H1a, H2a, H3a, H4a
H1a, H2a, H3a, H4a
H1b, H2b, H3b, H4b H1b, H2b, H3b, H4b H1b, H2b, H3b, H4b H1b, H2b, H3b, H4b H1c, H2c, H3c, H4c H1c, H2c, H3c, H4c H1c, H2c, H3c, H4c H1c, H2c, H3c, H4c
Relation between CCC and ROE/ROA
YCCC= B0+B1ROE+B2ROA+B3Size
Relation between CCC and ROE/ROA in the US
YCCC= B0+B1ROE+B2ROA+B3Size
Relation between CCC and ROE/ROA in Japan
YCCC= B0+B1ROE+B2ROA+B3Size
Relation between CCC and ROE/ROA in France
YCCC= B0+B1ROE+B2ROA+B3Size
Relation between the collection period and ROE/ROA
Ycollection period= B0+B1ROE+B2ROA+B3Size
Relation between the collection period and ROE/ROA in the US
Ycollection period= B0+B1ROE+B2ROA+B3Size
Relation between the collection period and ROE/ROA in Japan
Ycollection period= B0+B1ROE+B2ROA+B3Size
Relation between the collection period and ROE/ROA in France
Ycollection period= B0+B1ROE+B2ROA+B3Size
Relation between the credit period and ROE/ROA
Ycredit period= B0+B1ROE+B2ROA+B3Size
Relation between the credit period and ROE/ROA in the US
Ycredit period= B0+B1ROE+B2ROA+B3Size
Relation between the credit period and ROE/ROA in Japan
Ycredit period= B0+B1ROE+B2ROA+B3Size
Relation between the credit period and ROE/ROA in France
Ycredit period= B0+B1ROE+B2ROA+B3Size
Relation between the inventory conversion period and ROE/ROA
Yinventory conversion period= B0+B1ROE+B2ROA+B3Size
Relation between the inventory conversion period and ROE/ROA in the US
Yinventory conversion period= B0+B1ROE+B2ROA+B3Size
Relation between the inventory conversion period and ROE/ROA in Japan
Yinventory conversion period= B0+B1ROE+B2ROA+B3Size
Relation between the inventory conversion period and ROE/ROA in France
Yinventory conversion period= B0+B1ROE+B2ROA+B3Size
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4. Results
4.1 Sample
Based on the availability of data in Orbis, 2266 companies from the US, Japan and France are selected for this study. First, the outliers are removed, based on the scatterplot (as an example the scatterplot of CCC06 has been added in the appendix, figure 7.1, pp. 55) and when the data differs more than 3.3 standard deviation of the mean. This has been done for every individual variable. If an outlier is detected the total firm is removed from the dataset. It appears that if a firm has an outstanding value in one variable, it often shows outstanding values in other variables as well. In that case, the complete firm was removed from this research. After deleting these outliers, the final data set includes 2054 companies. There are 751 US firms, 1133 Japanese firms and 170 France firms.
The descriptive statistics can be found per country in table 7.1 (US, pp. 52), 7.2 (Japan, pp. 53) and 7.3 (France, pp. 54) in the appendix. These tables show that there is some difference between the lengths of the cash conversion cycle (CCC) in the three countries. In the US and Japan the mean length of the CCC of the five selected years is respectively 61,610 days and 62,685 days, while in Japan this is 71,078 days. However, in the US the collection period (COP) (44,715 days) and the credit period (CRP) (23,739 days) are lower than in Japan (respectively 69,083 and 40,549 days) and in France (respectively 71,900 and 50,954 days). Japan has the lowest inventory conversion period (ICP) of 34,150 versus 40,634 days in the US and 50,132 days in France.
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4.2 Correlations
The correlation matrix (table 7.4, pp. 58 (US), table 7.5, pp. 59 (Japan) and table 7.6, pp. 60 (France) in the appendix) measures the strength of the correlation between the different variables. In these tables the correlation between the different variables is measured. Correlations are always conducted in a specific year. For example the CCC06 is correlated with the ROE06 and ROA06 and CCC07 is correlated with ROE07 and ROA07.
The values of most correlations are relatively constant over the years (no large differences in and between the countries). Also, the direction of the correlation is often constant. There is a negative correlation between CCC and ROE and a positive correlation between CCC and ROA. This holds for all the countries in every year. This means that when the CCC becomes shorter, the ROE becomes higher and the ROA becomes lower. However not all these correlations are significant. In France the correlations are the least significant (only CCC en ROA correlate significant in 2008). In Japan the significance is the highest (only no significance between CCC and ROA in 2008 and 2009). In the US not all the correlations are significance.
The separate parts of the CCC do not have a constant relationship with the ROE and ROA. The direction of this relationship is not consistent and also the strength of the correlation differs between the countries.
For the US there is a positive relationship between COP and ROE (except in 2009 and 2010) and also a positive relationship between COP and ROA (except in 2010). The correlation between CRP and ROE is positive in 2006 and 2008 and negative in 2007, 2009 and 2010, but the correlation between CRP and ROA is negative. For ICP the correlation with ROE is significantly negative, while the correlation with ROA is positive (except in 2009 and 2010).
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and ROE and CRP and ROA is significantly negative. The correlation between ICP and ROE and ICP and ROA is significantly negative (except for ROA in 2010).
For France the correlation between COP and ROE is positive (except for 2007) and the correlation between COP and ROA is positive for 2006, 2008, 2009 and negative for 2007 and 2010. The correlation between CRP and ROE is positive in 2006 and 2007 and negative in 2008, 2009, 2010 and the correlation between CRP and ROA is significant negative. The correlation between ICP and ROE is negative and the correlation between ICP and ROA is negative for 2006, 2009 and 2010 and positive for 2007 and 2008). In France the correlations are thus the least constant in comparison to the other countries.
There is a relatively constant correlation with the same direction between the dependent variables (CCC, COP, CRP, ICP) and the control variable sales. Also the correlation between sales and the independent variables (ROE, ROA) is relatively constant and with the same direction (with exception of in Japan in 2006 and 2008).
For all the countries, in all the years, the correlation between ROE and ROA never exceeds 0.9. This correlation indicates that these two variables can be used in the same regression model.
4.3 Regression analysis
4.3.1 Assumptions
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states that the reason for OLS not being optimal when heteroscedasticity is present, is that it gives equal weight to all observations when actually observations with a larger disturbance variance contain less information than observations with smaller disturbance variance. The standard errors are biased when heteroscedasticity is present. This can lead to bias in test statistics and confidence intervals.
Brooks (2008) state that if heteroscedasticity is known, then an alternative estimation method can be used which takes this into account. One possibility is to use generalized least squares (GLS). This regression is based on the same basic assumptions as the assumptions for ordinary least square regressions. Eviews always conducts these generalized least squares, so this will not be a problem. However in SPSS the method of GLS is not available. An alternative can be found in Weighted Least Squares. However, this method is very difficult and the wrong choice of weights can produce biased estimates of the standard errors or if the weights are correlated with the disturbance term, the WLS slope estimates will be inconsistent (Allison, 1999).
Allision (1999) states that unless heteroscedasticity is ‘marked’, significance tests are virtually unaffected and thus OLS estimation can be used without concern of serious distortion. Severe heteroscedasticity can sometimes be a problem. Due to the focus on the coefficient of the regression, and not on the standard errors, OLS regression has been used to analyze the data.
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analysis itself is also tested on normality due the skewness and kurtosis and a P-P Plot and a histogram for every variable (for example see figure 7.2 and 7.3 in the appendix, pp. 53-54). Only if the normality of the regression is between previous determined margins of normality, the results of this specific regression model will be used.
The results of the regression analysis can be found in table 7.7 till 7.10 in the appendix (pp. 61-64). In each table four regression models are tested for one year. For example, in table 7.7 (pp. 61) the regression model between CCC and ROE/ROA in 2006 for the US, Japan, France and for the total of countries can be found. The regressions are always conducted with variables within one country, thus the regression of CCC06 of the US is always conducted with ROE06 and ROA06 of the US. This is an important fact to keep in mind when reading the tables.
In table 7.11 and 7.12 in the appendix (pp. 65-66), the regression analysis between the coefficients of the previous regression can be found. Here the coefficients of Japan will be compared to the coefficients of the US.
4.3.2 Results
Only if the regression has a normal distribution (skewness between -1 and +1 and kurtosis between 2 and 4), the histogram, the P-P plot and the scatter plot look normal and the F-value is statistically significant at a 0,05 level, the results of the regression can be used to draw conclusions. This is tested for all the regression models. An example of the histogram, P-P plot and scatter plot of model 1 in 2006 can be found in figure 7.1 till 7.3 in the appendix (pp. 52-54).
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the results is questionable. Therefore, it has been decided not to include France in the conclusions and only compare the US and Japan. Japan and US have opposite scores on the culture dimensions and legal system, so comparison of only these two countries is still valid.
The R squared of the regressions is often low. In definition, R squares is the suitability of statistic fit, thus that is how well the regression model actually fits the data (Huizingh, 2006). However as a rule of thumb a low R squared is not uncommon in financial data analysis. R squared is very important when the sample size is low, for example N is 10. However in this study the sample sizes are large (N>800), which reduces the focus on low R squared values. The validity of the regression analysis will not be evaluated based on the R squared values.
4.3.3 Hypotheses
Hypothesis 1 states that there is a negative relation between CCC and firm performance. The results show that there is a significant negative relationship between CCC and ROE in the US in every year (model 2, table 7.7, pp. 61). Also for Japan a significant negative relationship between CCC and ROE is found (except in 2008) (model 3, table 7.7, pp. 61). The results show that there is a significant positive relationship between CCC and ROA for the US (model 2, table 7.7, pp. 61) and Japan (model 3, table 7.7, pp. 61).
Hypothesis 1 can thus be confirmed when performance is measured with ROE. When performance is measured with ROA the relationship is positive, which leads to the rejection of hypothesis 1.
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Hypothesis 2 states that the relation between CCC and performance is stronger in countries that are more individualistic. This expects a stronger relation between CCC and ROE/ROA in the US compared to Japan. Based on the results states above, this hypothesis is not confirmed.
Hypothesis 3 states that the relation between CCC and performance is stronger in countries that have higher uncertainty avoidance. This expects a stronger relation in Japan compared to the US. Based on the results stated above, hypothesis 3 can be confirmed if performance is measured with ROE. However if performance is measured with ROA, hypothesis 3 is rejected.
Hypothesis 4 states that the relation between CCC and performance is stronger in countries that are more short-term oriented. This expects a stronger relation in the US compared to Japan. Based on the results above, hypothesis is not confirmed.
Hypothesis 5 states that the relation between CCC and performance is stronger in common law countries than in civil law countries. This expects a stronger relation in Japan compared to the US. This hypothesis is confirmed, but only if performance is measured with ROE. With ROA as measurement hypothesis 5 is rejected.
Hypothesis 1a states that there is a negative relation between the collection period (COP) and firm performance. The results show that the relation between COP and ROE is significantly negative in Japan (model 7, table 7.8, pp. 62). The relation between COP and ROA is significantly positive (model 7, table 7.8, pp. 62). The results for the US are not significant (model 6, table 7.8, pp. 62) so these results cannot be included in the conclusion. This means that hypothesis 1a is only confirmed for Japan if performance is measured with ROE.
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Hypothesis 1b states that there is positive relation between the credit period (CRP) and firm performance. The relation between CRP and ROE is significantly positive in the US and Japan (model 10 and 11, table 7.9, pp. 63). The relation between CRP is significantly negative for the US and Japan (model 10 and 11, table 7.9, pp. 63). However, due to normality problems, model 10 is not reliable (see paragraph 4.3.2) and thus not included in further analysis and conclusion making. This means that hypothesis 1b is confirmed for Japan and if performance is measured with ROE, but this hypothesis is rejected if performance is measured with ROA.
Due to the exclusion of model 10 of the US, no reliable comparison can be made between the US and Japan. This means that hypothesis 2b (the relation between CRP and performance is weaker in countries that are more individualistic), hypothesis 3b (the relation between CRP and performance is stronger in countries that have higher uncertainty avoidance) and hypothesis 4b (the relation between CRP and performance is weaker in countries that are more short-term oriented) are all rejected.
Hypothesis 1c states that there is a negative relation between the inventory conversion period (ICP) and firm performance. The results show that there is a negative relation between ICP and ROE in every year in both the US and Japan (model 14 and 15, table 7.10). However, this relation is significant in the US in 2007 and 2010 and significant in Japan in 2006, 2009 and 2010. Model 15 for the year 2010 is excluded from further analysis due to normality problems (see paragraph 4.3.2, pp. 36). The relation between ICP and ROA is not constant for the US and Japan. In some years it is positive and in other years negative (model 14 and 15, table 7.8, pp. 62). Also the results are not significant. This means that hypothesis 1c is rejected.
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5. Conclusion and discussion
5.1 Conclusion
In order to answer the main research question ‘how does culture influence the relation
between liquidity and performance of an organization?’ five hypotheses have been
developed and tested by empirical quantitative research. This has led to the following results.
A significant negative relation between cash conversion cycle (CCC) and return on equity (ROE) in the US and Japan is found. This relation appeared to be stronger in countries with more uncertainty avoidance and in countries that have a common law system. This means that three hypotheses are confirmed and uncertainty avoidance and legal system have an influence on the relation between CCC and ROE. In countries with higher uncertainty avoidance or a common law system the relation between CCC and ROE is stronger. However, against expectations, there is found a significant positive relation between CCC and ROA in the US and Japan. This makes that these hypotheses cannot be confirmed, but this inverse relationship is still an interesting result.
The hypotheses on the relation between the separate parts of the CCC and ROE have been confirmed. Also here the relation with ROA is, against expectations, often reversed. A negative relationship between the collection period and ROE and a positive relationship between the collection period and ROA in Japan is found. There is also found a positive relation between the credit period and ROE and a negative relation between the credit period and ROA. There is found a negative relation between the inventory conversion period and ROE. Unfortunately, the results of the US turned out to be not significant in most years, which make comparison not possible. Due to this insignificance, no statements can be made on the influence of culture on the relationship between the different parts of the cash conversion cycle and organizational performance.
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influence of culture, which is questioned in the main research question, is very limited in this research.
5.2 Discussion
As for every study, this research has several methodological and general limitations and recommendations for future research. Also, possible explanations for the limited influence of culture can be indicated.
France is not included in the conclusions. The results of the regression analyses did not meet the normality assumptions or the F-test is not significant. The sample size of French firms was a lot smaller than the sample size of the US and Japan. This can be a reason for this insignificance.
The coefficients of the regression results of Japan are always stronger than the US (see table 7.7 till 7.10 in the appendix, pp. 61-64). Is this because the relation between CCC and performance in Japan is actually stronger? Or does it depend on the sample of this particular set of organizations? However, there is not always a significant difference between the regression coefficients, which indicates that the liquidity-performance relation in Japan is not always significantly stronger than in the US. This is an interesting but contradictory result. Future research will have to show if this relation is indeed much stronger in Japan in comparison to other countries.
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net income will stay equal, ROE stays equal but ROA will decrease. If the days in the CCC decrease, the liquidity increases, the total assets increases, which leads to a lower ROA (the denominator will be higher, so ROA will be lower). This explains the positive relation; when CCC decreases, ROA decreases. Liquidity has no direct influence on ROE calculation. ROE only changes if a lower CCC and then a higher liquidity an increase of the net income will be accomplished. This explains the contrary relation between CCC and ROE and ROA.
For this research, the specific influence of culture and legal system on the liquidity-performance relation is investigated. These two factors are only a small part of all factors that can influence this relationship. That culture and legal system only explain a small part of this relation could also be observed by means of the low values of R squared. However, low values of R squared are not uncommon for statistical testing with financial data. On the other hand though, these R squared values should not be ignored completely. The most important conclusion from these values is that this research should be seen in a larger picture, in which a lot of other variables have an influence as well. Therefore, the validity of this research can be considered not that high. This validity can be increased by including more variables that influence CCC or performance or their relationship. This is a good recommendation for future research. Variables that can also influence the liquidity-performance relation are for example the influence of the economical crisis, organizational culture, process management or competitors.
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unconstrained firms, because they are able to acquire external funds, for example by share issuing. Hereby the expectation is that there is no influence of the financial crisis on the liquidity of the investigated firms and thus the liquidity-performance relation is not affected. However, it is possible that the financial crisis can influence the net income in of an organization, for example due to less sales or higher costs of goods. Future research is necessary to investigate how large the influence of this crisis has been on organizational performance in general.
Furthermore, organizational culture could also have an influence on the liquidity-performance relation, which has not been included in this study. Organizational culture refers to the underlying, shared values that provide employees with behavioral norms in the firms (Webster and White, 2010). Especially in multinational organizations, where different ethnicities and national cultures come together, organizational culture can organize individual behavior and provides organizational members with structure (De Witte and van Muijen, 1999). Jung et al. (2008) and Webster and White (2010) state that essence of organizational culture is significantly influenced by the national culture in which the company is located. However, organizational culture is transferred into foreign subsidiaries and these subsidiaries are managed in accordance with the culture of the parent, which suggests the importance of organizational culture over or besides national culture (Chang and Tayler, 1999). The role and importance of organizational and national culture can differ between organizations. Especially due to the variety of national cultures in a multinational organization organizational culture can be more important and determining for management practices than national culture. Listed firms are often large and internationally oriented.
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Further research is needed to see how large this influence of organizational culture on the relationship between liquidity and performance is and if it is less, more or equal important compared to the influence of national culture.
Finally, process management techniques, for example just in time, or competitors can influence the cash conversion cycle and thereby the liquidity-performance relation. For example, due to just-in-time management the inventory conversion period will be as short as possible and this decreases the length of the total cash conversion cycle. Management decisions about the used process management techniques will be made under the influence of national or organizational culture. But also the strategy and structure of an organization is determinative in making these decisions. At the same time the behavior of competitors and their procedures and rules about collection and payment terms can influence the cash conversion cycle of the company as well. The influence of process management techniques and competitors behavior are additional influencing factors. However, in large, established organizations the influence of process management techniques is very determining for the performance of an organization. National culture can be an influencing factor on this process management decisions but finally the influence of process design can overrule the influence of national culture.
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6.
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