Retrospective wisdom: Long-term orientation and the rating downgrades of financial institutions

This study examines the effects of Hofstede's long-term orientation (LTO) on rating changes in financial institutions (FIs) in 50 countries. The impacts of LTO on rating downgrades are stronger for the speculative grade-rated FIs and more pronounced for the crises sample. The significance effect of LTO on downgrades is robust to various tests and is unlikely due to endogeneity. Switching from a short-term-oriented to a long-term-oriented (LT-oriented) culture lowers the downgrade risk of an FI by 47%, a speculative grade-rated FI by 56%, and an FI of a country in crisis by 58%. LT-oriented societies promote responsible borrowing and a good payment culture. A strong preference for long-term business survival motivates banks in LT-oriented nations to maintain a more prudent bank credit-to-bank deposits ratio, particularly during crises. Incorporating the LTO in banking regulations may encourage banks to adopt long-term perspectives and finance sustainable long-term projects. •Long-term orientation (LTO) reduces the rating downgrade hazards of financial institutions (FIs).•LTO’s impacts are stronger for speculative-grade rated FIs and are more pronounced during crises•LT-oriented societies promote responsible borrowing and a good payment culture.•Banks in LT-oriented nations maintain a more prudent bank-credit-to-bank-deposits ratio.