This paper is one of the first to provide empirical evidence that cultural value distance affects domestic capital allocation in the context of cross-regional investment. Examining regional variation in China, we find that cultural value distance in ownership, trust, and opportunism dimensions negatively impacts the volume of cross-regional investment. These results are robust to several alternative measures, and instrumental variable approaches using terrain distance and surname difference. We explore whether regional cultural values influence cross-regional investment through information distance and social network mechanisms, as well as their potential to increase operating costs. We also find that this negative effect is more pronounced among regions with high Confucian difference, dialect distance, and market segmentation difference. Further, the results show that the cultural values of CEOs and politicians have a significant influence on corporate investment decisions.

This study investigates the association between managerial ability and cost rigidity. Cost rigidity refers to the relative proportion of fixed and variable costs. We expect that high‐ability managers will assess the potential upside congestion and downside default risks and choose an appropriate level of cost rigidity accordingly. Our results show that, on average, high‐ability managers tend to adopt a more rigid cost structure because they are more likely to realize favorable demand, and therefore, they retain higher capacity with more fixed inputs to alleviate potential congestion risk. We further document that firms with high‐ability managers will exhibit a higher (lower) level of cost rigidity when facing higher congestion risk (default risk). Our results are robust to using a propensity score matching method, a CEO turnover subsample, and alternative measures of cost rigidity and managerial ability. Taken together, this study suggests that firms' capacity management choices vary with the level of managerial ability.