Culture and cost of equity

The article National Culture and International Differences in the Cost of Equity by Gray, Kang and Yoo (2013) sought to investigate if equity capital is influenced by factors of national culture. Specific factors of culture that were investigated included the cultural values, beliefs, religion, and social groups. The article argues that determining factors that determine cost of equity is important for various reasons. First, the cost of equity is a major determinant in making major budgetary decisions. Second, the research would enable researchers to estimate more accurately the cost of equity in future hence enabling for more accurate estimations of equity. The research carried out here is most likely beneficial to investors who would want to determine the risk of certain equities.


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In this study, the major variables were uncertainty avoidance and individualism. The study also controls for masculinity and power dist6ance since they have also been identified as cultural factors. It controls for formal institutional factors such as the strength of the legal system which has been known to influence the cost of equity worldwide.

The study was based on organizations based in 32 countries over the years 1992 – 2006.  The countries were selected in such a way that they represented all culture areas. Accounting data was extracted from COMPUSTAT. The exchange rates used were obtained from IMF’s International Financial Statistics.

The companies were selected in such a way that their data was easily accessible, they were not financial companies, had not made huge losses over a period of five years within the study period, and had all the risk proxies available. The data obtained was compared with country averages of culture and control variables was then compared to determine if there existed any relationship between national culture and the cost of equity.


As predicted, the researchers found that the higher in more individualistic countries and lower in more uncertainty avoidant countries. The analysis was carried out at two levels. First, the analysis was carried out at country level but with country weighted measures. Second, the analysis was carried out the way but without the weighting. The studies showed similar results.

The research strived to keep the research as economical as possible. However, they also strived to ensure that the information obtained was satisfactory and up to date. They also carried out research to ensure that the cost of equity did not show sensitivity to other factors while they were measuring for the effect of culture.

Article critique

While the research uses data that is properly distributed across all cultures, the researchers fail to acknowledge the effect of organizational culture on this effect. Organizational culture must have an effect on the cost of equity since it affects culture. Organizational culture is also more impactful in certain cultures than in others especially on a political context. The paper fails to acknowledge this effect as one that would be measured on a national level.


International costs of equity were found to be related to culture. Culture was found to be an informal source of effect on the cost of equity. The study was based in 32 countries which were distributed across the cultural domain. The research confirmed that both individualism and uncertainty avoidance affected the cost of equity. The study however fails to look into organizational culture which might have participated in the results of study. The article however serves the purpose for which it is intended to a greater extent and the efforts put into it cannot be brushed off.


Gray, S., Kang, T., & Yoo, Y. (2013). National Culture and International Differences in the Cost of Equity Capital. Management International Review, 53(6), 899-916. doi:10.1007/s11575-013-0182-3

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