The Role of Culture in

Finance
Presented By:
Sonia Singhal
Varaniya Ezhava

Why culture matters?

Definition:
Transmission from one generation to
the next, via teaching and imitation, of
knowledge, values and other factors
that influence behavior.
It is said that the most common way to
examine relationship between culture,
behavior and finance is through
language, wars, ethnicity and religion.

Why culture matters?

There was an argument that cultural
influences change very slowly.
Three possible reason for it is:
Parent tend to children what they
have learned without reevaluating
the reason for past actions.

Continue..
Organizations that promote culture
may have a vested interest in
maintaining a certain behavior.
Some cultural norms may have lower
economic value.

Its Affect..
Culture can affect firm-level finance
and development through at least
three channels.
The values that are predominant in a
country depend on its culture.
For eg: charging interest can be a sin
in one religion but not in another

Continue..
Culture affects institutions.
For eg: culture values and priorities
influence the legal system.
Culture affects resource allocation in
an economy.
For eg: religions that encourage
spending on churches take resources
away from investment in production.

Values and Trust

The culture of a country or group can
influence its value.
Guiso, Sapienza and Zingales said
that culture can affect finance.
They said this because they
examined the impact of religion and
ethnicity on trust and show that
religion and ethnicity affect trust
within a society.

Values and Trust

They showed that level of trust
influences economic outcomes.
The level of trust within a society can
influence its development and across
country can affect the level of crossborder trade.

For Eg:
Guiso use relative trust across
European countries to examine the
impact of trust on bilateral trade.
The outcome is that more trust leads
to more trade between the countries.

Resource Allocation
Different cultures have diverse attitude
towards finance.
Catholics have a deep misgivings about
anything related to finance.
The mere fact that there were papal
declarations on acceptability of receiving
interest on payment and that banking is
not a sinful profession indicates the
extent of these misgivings.

CULTURE AND ECONOMIC

DEVELOPMENT
The effect of culture happens at two levels :
1. Economic development
2. Firm or Investor level
Important responsibility of any government is
the economic development of the nation.
Over time, countries that appear to be similar
develop at different rates and in divergent
ways.
And this shows that the financial development
substantially affects economic growth.

 For eg: Case study of the Maghribi

and Genoese traders of eleventh and
twelvth centuries.
The case examines the importance of
culture and how the acceptance of
institutions can impact the economic
development of the society .

To examine the role of trust on

various economic outcomes:
Six dependent variables that
affect Economic growth

Trust and cooperation

Women
The government
The law
The market and its fairness
Thriftiness

CULTURE AND TRADE

The economic impacts of culture affect more
than just the internal growth.
Culture also affects both the trade with the
investment in other countries, as well as its
openness to trade and development.
They base their study on data of levels of
bilateral trust between European countries.
The authors find that the geographic proximity
between the involved countries and
commonality between their languages
significantly affect the level of bilateral trust.

 The research shows that countries

where 90 percent of citizens share
the same religion have a level of
bilateral trust that is one quarter and
those are higher than those
countries without such a dominant
religion.
The study also finds that less trust
leads to less portfolio investment and
less direct investment.

IMPACT OF CULTURE ON FIRM AND

INVESTOR BEHAVIOR
Culture has a role in the development of
institutions, culture may affect a manager
or an investor.
Grinblatt and Keloharju show that finnish
investors prefer to hold, buy or sell
securities of firms that are located close to
the investor.
Communicate in the same language, and
have CEOs of the same cultural
background.

IMPACT OF CULTURE ON FIRM AND

INVESTOR BEHAVIOR
This study shows Home Bias and
preference for certain securities goes
beyond the location of firm but also
possesses a culture component.

CONCLUSION
Culture influences finance in many ways.
Societies decides on the type of law and institutions
that they desire to develop. But that decision is
influenced by the cultural biases that has been
developed by religious belief, wars, language,
ethnicity, and the other factors that determine
current behavior.
There fore cultural biases will affect the development
of lows and the enforcement of those laws, as well as
institutions and capital markets.
The development of laws and financial market
directly influence the economic development.

THANK YOU