Culture's Consequences in Controlling Agency Costs: Egyptian Evidence
Journal of International Accounting, Auditing and Taxation, Vol. 14, No. 1, pp. 19-32, 2005
Posted: 5 May 2005
This study examines the business environment of Egypt, a nation at the beginning of its transition to a market economy, to determine whether national culture is associated with the use of accounting-based debt covenants in debt agreements. As a country's economy develops, agency problems occur. One method of reducing agency costs is the use of accounting-based debt covenants. While there has been extensive research on agency theory, most of this research has focused on developed nations. We examine three periods of Egyptian economic development using one hundred and forty Egyptian debt agreements. The use of accounting-based debt covenants increased significantly during each successive period of development. Proxies for each of Hofstede's (1980) cultural dimensions are significantly different between the three periods, suggesting that national culture changes with economic development. Three of the four cultural dimensions are significant when regressed on the number of accounting-based debt covenants in debt agreements. This indicates that as a country develops, national culture is associated with the control and understanding of the business process.
Keywords: Debt covenants, agency costs, national culture
JEL Classification: M41, M44, M47, G32
Suggested Citation: Suggested Citation