Personal Determinants of External Finance

Robert H Davidson
Pamplin School of Business, Virginia Polytechnic Institute and State University

Christo Pirinsky
United States Securities and Exchange Commission

February 2017


We study the link between individual propensity to violate social norms and demand for finance based on two datasets – the World Values Survey and a dataset with the legal records of CEOs of U.S. publicly traded companies. We find that individuals who are more likely to violate social norms are more likely to borrow. Executives with legal records are also more likely to borrow at the personal level as well as raise external capital for their firms. The results cannot be attributed to greater risk-tolerance of non-compliant individuals. We argue that non-compliance relaxes participation constraints in capital markets by lowering the psychological costs for entering and breaking a contract.

Keywords: Social norms, law and finance, compliance, external financing, borrowing decisions.

JEL Classification Codes: G02; G21; K42

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