Banking and Finance

Culture Influences Financing Decisions

The cultural identity of managers can influence the way an organization finances itself. An economist at UZH has shown that companies led by Italian-speaking people take up credit more often than those managed by German-speakers.

Nathalie Huber

italienische Bank
italienische Bank
In South Tyrol, companies with Italian-speaking managers have higher debt amounts in their balance sheets than those with German-speaking managers. (Image: iStock / ilbusca)


A company’s finance structure – the mix of debt and equity capital it opts for – depends on a variety of factors. Previous research has shown that the size, profitability, and age of an organization, as well as the industry and the overarching macroeconomic situation it operates in, can all have an impact on its capital structure.

How much money a company borrows from banks to fund investments, how much equity it includes in the mix, or whether it creates reserves, are matters of business policy. It’s been demonstrated that the individual characteristics of managers can influence business policy. UZH economist Emilia Garcia-Appendini has joined forces with other economic experts to investigate whether managers’ cultural backgrounds likewise influence their companies’ capital structure.

Same jurisdiction, different culture

To examine this cultural component of financing decisions, the research team limited itself to around 3,500 companies based in the same jurisdiction but differing from a cultural point of view. “This way we avoid the problem of falsely ascribing unnoticed differences in the institutional, legal or macroeconomic frameworks to cultural origins,” explains senior researcher Garcia-Appendini.

She’s working on the assumption that language has a major influence as a marker of culture. The northern Italian province of South Tyrol, home to two linguistic groups, therefore makes a good geographic area for her study. Italian and German speakers live in the same region, but as a rule each group has a more or less different social life. For example, children attend separate schools depending on their background.

Dr. Emilia Garcia-Appendini
Dr. Emilia Garcia-Appendini
Emilia Garcia-Appendini: "Managers from cultures that are seemingly close display major differences when it comes to important decisions on corporate finance." (Image: Nathalie Huber)

“Debt” has negative connotations in German

Based on previous studies, Garcia-Appendini has formulated the hypothesis that specific characteristics of the Italian and German linguistic groups could influence financing decisions. She points out, for example, that the German word for debt, “Schuld,” has a negative, moral connotation that also implies “damage” or “harm.” “Debito,” by contrast, from the Latin “debere,” is a more neutral term meaning owing someone something, being in their debt, or showing them appreciation. “It’s reasonable to assume that Italian speakers are more likely to borrow money and run up debt that German speakers,” posits Garcia-Appendini.

The author of the study also says that there are significant differences between the two cultures in South Tyrol in terms of their trust in institutions. “We can assume that people of Italian origin will borrow less from formal institutions such as banks, but are more likely to seek informal sources of funding, for example trade credit from suppliers,” she says.

To verify her hypotheses, the research team is comparing the bank and trade credits and equity stated on the balance sheets of primarily owner-managed small companies, all in the same city and the same industry, with a similar size and profitability but differing in terms of the cultural origin of their principal manager. “Since most businesses in the province are private, small and owner-managed, the culture of the principal manager can be extended to the company itself,” explains Garcia-Appendini. On the basis of the first and last names of principal managers, the authors are able to assign them clearly to either the Italian or German cultural group.

Companies managed by Italian speakers take up debt more frequently 

The study yielded the following findings: Companies with Italian-speaking managers take up debt 5.5 percent more frequently than those managed by German speakers. They seek funding from financial institutions 10.7 percent more frequently, and are 5.5 percent more likely to borrow from their suppliers in the form of trade credits. Companies managed by Italian speakers also have more debt on their balance sheets (i.e. are more highly leveraged), with the ratio of debt to total assets 3.3 percentage points higher.

The researchers have subjected these main findings of their study to additional robustness tests. These show that even alternative explanations – for example a greater decline in net assets at companies managed by Italian-speakers following the financial crisis, differences in the availability of credit, the concentration of cultural groups in certain sectors, and the selection of managers from a specific linguistic group at companies with greater leverage – do not influence the principal findings.

The authors conclude that cultural background plays a decisive role in financing decisions: “We have found that managers from cultures that are seemingly close who live alongside one another display major differences when it comes to important decisions on corporate finance,” Garcia-Appendini summarizes. “Overall, our main findings confirm our hypothesis that German-speakers are less likely to borrow because of the negative connotations of the word ‘Schuld’.” On the other hand, the researchers have not been able to confirm the hypothesis that Italian speakers have less trust in formal institutions.

Nathalie Huber, Editor UZH News; English translation by Caitlin Stephens, UZH Communications

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