CULTURE MATTERS (BUT WHOSE CULTURE MATTERS MORE?) EVIDENCE FROM INTRA-FIRM CHANGES IN CEO

Abstract

Agency theory specifies that conflicts of interest are primarily driven by the pursuit of self-interest. However, agency theory does not explicitly consider how norms and values impact one’s pursuit of self-interest, which then affects the conflicts of interest within a transaction. We propose that understanding differences in national culture helps us to better understand how conflicts of interest (and the resultant contracting costs) may vary across nations. We specifically consider how cultural attributes may affect decisions regarding the hiring of CEOs. Our empirical analysis seeks to identify why some firms are more willing to hire CEOs from another culture while other firms appear more comfortable hiring CEOs of the same culture. We find that firms from countries with cultures more tolerant of uncertainty are more willing to accept CEOs from a different culture.  Also, firms from countries with cultures that embrace individualism are more willing to hire a CEO from a different culture.  Our results are robust to the use of various alternative measures of the nation’s cultural attributes.