Cultural traits and stock market development: an empirical analysis
| Date | 13 April 2015 |
| Published date | 13 April 2015 |
| Pages | 33-49 |
| DOI | https://doi.org/10.1108/JEPP-01-2013-0003 |
| Author | Nabamita Dutta,Deepraj Mukherjee |
| Subject Matter | Strategy,Entrepreneurship,Business climate/policy |
Cultural traits and stock market
development: an empirical
analysis
Nabamita Dutta
Department of Economics, College of Business Administration,
University of Wisconsin, La Crosse, La Crosse, Wisconsin, USA, and
Deepraj Mukherjee
Department of Economics, College of Business,
Kent State University, Kent, Ohio, USA
Abstract
Purpose –During recent times, the stock market has emerged as a major financial institution of an
economy. Yet, cross-country differences, in size and role of stock market, persist. The purpose of this
paper is to investigate the correlation between cultural traits and the development of the stock market
in a country. Considering multiple dimensions of culture, identified in the literature by Hofstede
(1980/2001) and World Value Survey, the authors construct the hypotheses: trust, a key cultural trait,
should positively influence stock market development; uncertainty avoidance, Hofstede’s cultural
dimension should negatively influence the development of the stock market; and individualism,
an alternate cultural dimension of Hofstede’s measures, should be positively correlated with stock
market development. The cross-country empirical analysis supports the hypotheses. The results hold
for multiple measures of stock market development.
Design/methodology/approach –This paper investigates the correlation between various cultural
traits and the development of the stock market in a country. Specifically, the authors consider three
different cultural trait measures. The authors consider a cross-sectional analysis of an extensive
number of countries. While all explanatory variables of interest are considered over the period
2000-2007, the authors consider 2008 figures for the dependent variables of interest, financial
development. Ordinary least squares is considered as the benchmark specification. Robust regression
has been considered as part of robustness analysis. The authors mention throughout the paper that the
results stress on significant association between the variables, only.
Findings –The empirical results support the hypotheses. The first measure, trust, is positively
associated with stock market development of a nation. Statistically, for one standard deviation rise
in trust (1 SD ¼37.5), stock market capitalization will go up between 11 and 19 percentage points.
Uncertainty avoidance, the second measure is negatively correlated and statistically, the impact is
much greater. Finally, the third measure, individualism, is positively correlated with stock market
development. Statistically, for one SD rise in individualism (SD ¼23.9), stock market capitalization will
rise by 23 percentage points.
Originality/value –Existing literature has stressed the role of cultural traits –trust, uncertainty
avoidance, individualism –in the promotion of entrepreneurship, innovation and growth. Since most
startups need to raise capital in order to implement their new ideas, cross-country heterogeneity in the
strength of capital markets may lead to important differences in entrepreneurship and productivity
growth across economies (Greenwood and Jovanovic, 1990; Jayaratne and Strahan, 1996; Levine, 1997;
Beck et al., 2000; Guiso et al., 2004). Yet, the link between stock market development and cultural traits
has not been established in the literature. This paper aims to fill this missing link.
Keywords Social capital, Financial entrepreneurship, Informal institutions
Paper type Research paper Journal of Entrepreneurship and
Public Policy
Vol. 4 No. 1, 2015
pp. 33-49
©Emerald Group Publis hing Limited
2045-2101
DOI 10.1108/JEPP-01-2013-0003
Received 21 January 2013
Revised 11 September 2013
Accepted 12 September 2013
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/2045-2101.htm
The authors would like to thank the editor and the referees for their invaluable comments and
suggestions.
33
Cultural traits
and stock
market
development
1. Introduction
An extensive array of literature highlights the importance of financial development in
terms of promoting entrepreneurship. King and Levine (1993a, b) and Levine (1997)
show that individuals, in need of external finance, can access the required capital
through developed stock markets. Their work brought prominence to the role of finance
in Schumpeter’s creative destruction. Entrepreneurs with new ideas and technologies
displaceincumbents with old technologies, leadingto a continued increasein productivity
and economic growth. The crux of this idearelies on a notion that productivitygrowth in
an economy mainly takes place atthe extensive margin (i.e. bythe birth of new firms and
the shutdownof unproductive firms) and noton the intensive margin (i.e. firms becoming
more productive internally). Since most startups need to raise capital in order to
implement theirnew ideas, cross-countryheterogeneity in the strengthof capital markets
may lead to important differences in entrepreneurship and productivity growth across
economies (Greenwood and Jovanovic, 1990; Jayaratne and Strahan, 1996; Levine, 1997;
Beck et al., 2000; Guiso et al., 2004) .
Recent studies have stressed the role of formal institutions (Huang, 2010; Clague
et al., 1996; Olson, 1993) in shaping a developed financial market. Do cultural traits also
play a role in stock market development and therefore can explain the cross-country
heterogeneity in financial markets? In this paper, we examine the association between
several cultural traits and the development of the stock market. The idea of culture
adopted in the present paper emerges from three broad definitions provided in the
extant literature. Hofstede (1980), in his pioneering study with IBM employees,
emphasizes culture as “the collective programming of mind which distinguishes the
members of one human group from another.”North (1990) in his seminal article defines
culture as “the rules of the game in society or, more formally […] the humanly devised
constraints that shape human interaction. In consequence they structure incentives
in human exchange, whether political, social, or economic”(North, 1990, p. 3). DiMaggio
defines culture as “shared cognition, values, norms, and expressive symbols”. Thus,
“culture”in the relevant literature is broadly defined. Hence, in order to understand
how culture influences stock market development, we have to find out which cultural
traits are relevant for this process and determine how these traits influence the stock
market development. We focus on three cultural traits in particular –trust from World
Value Survey (WVS) and European Value Survey (EVS) database, uncertainty
avoidance (risk aversion), and Individualism/Collectivism. The last two measures are
taken from Hofstede’s (2001) analysis. Before proceeding further let us provide the
rationale behind exploring the associations of the above mentioned cultural traits and
stock market development.
Hofstede (1980) refers to uncertainty avoidance as the extent to which people of a
culture feel threatened by uncertain or unknown situations and the extent to wh ich
people try to minimize such uncertainty. Literature suggests that investors from high
uncertainty-avoiding countries are likely to be more conservative and more risk-averse
(see e.g. Barberis et al., 1998). High conservatism is likely to be associated with
less risky investments and thus we expect a negative relationship between uncertainty
avoidance and stock market development. Countries that are more accepting of
uncertainty should have well developed stock markets.
Another dimension of culture considered by Hofstede is individualism-collectivism
(Hofstede, 1980, 1983; Hui and Triandis, 1986; Parson and Shils, 1958; Schwartz, 1990).
Individualism refers to a self-orientation, an emphasis on self-sufficiency and control,
the pursuit of individual goals that may or may not be consistent with in-group goals,
34
JEPP
4,1
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