Essays on the Role of Firms’ Competition Culture in Finance: A Textual Analysis Based Approach

Abstract

In this thesis, we introduce a measure of firms’ competition culture based on a textual analysis of firms’ 10-K filings. Using this measure, we study the relationship between competition culture and various phenomena in corporate finance for a large sample of US-based financial and nonfinancial firms. The thesis is comprised of three main studies as follows.

The first study develops a measure of firms’ competition culture and based on theory and our own reasoning validate the measure by relating it to other well-known indicators of firms’ competition culture. Further, in this study, we argue and provide evidence that transient institutional ownership intensifies firms’ competition culture, while dedicated institutional ownership lessens it.

In the second study, we argue that firms with greater levels of competition culture are more prone to meet/ beat analysts forecast and experience idiosyncratic stock price crashes. In this vein, we provide direct evidence that those firms with higher competition culture are able to consistently beat analysts’ forecasts. In addition, we present evidence that firms with more intensive competition culture are susceptible to firm-specific stock price crash risk. Furthermore, we investigate whether firms’ competition culture is a channel through which institutional investors are able to affect crash risk. In doing so, we document a positive relationship between competition culture and crash risk only among those firms with a high proportion of transient and a low proportion of dedicated institutional ownership. What is more, we directly test and find evidence that supports the notion that firms’ competition culture partially mediates the relationship between the composition of firm’s dedicated and transient institutional ownership and firm-specific crash risk.

Finally, we examine the effect of competition culture on bank lending and loan loss provisioning. We find evidence that banks with greater levels of competition culture are generally more prone to engage in lending and loan loss provisioning activity. However, we find that during the recent financial crisis banks with higher pre-crisis competition culture reduce lending more and have a more pronounced increase in loan loss provisioning during the crisis.

The findings of this thesis have important policy implications since it signals that competition culture is able to affect a number of economic outcomes.