Reading Between the Lines: Deciphering Corporate
Culture’s Role in Finance

Abstract

In this thesis, we introduce new textual-based measures of corporate culture using the Denison model. By utilizing these measures, we examine the relationship between corporate culture and various firm outcomes within the context of corporate finance for a large sample of US public-listed nonfinancial firms. The thesis is comprised of three main studies as follows.

The first study investigates the relationship between corporate culture and firms’ stock return comovement. Using Roll’s (1988) R2 model to estimate comovement and our new measures of corporate culture, we hypothesize and find that an external culture positively impacts stock return comovement, whereas we observe a negative relationship with an internal culture. Furthermore, we find that the culture-comovement relationship reverses during periods of crisis; namely the Covid-19 pandemic and the Global Financial Crisis. Additionally, we find that analyst coverage is higher for firms with stronger external cultures.

In the second study, we investigate the relationship between adaptability culture and the propensity to meet or beat analysts’ expectations. Building on the results of the first study where we found a positive link between externally oriented cultural traits and analyst coverage, we hypothesize and find that the more adaptable companies are, the more likely that they meet or beat analysts’ earnings estimates. More interestingly, we explore how this is possible and find that adaptability is positively linked to the use of real earnings management. Furthermore, we find that adaptable firms attempted to switch their earnings management tactics in the recent COVID-19 pandemic period. Particularly, we find that during that period they relied on accruals earnings management in a bid to avoid any negative earnings surprises.

In the final study, we explore the relationship between adaptability culture and default risk. We hypothesize that adaptable firms are better able to navigate ongoing challenges and should therefore enjoy a higher level of corporate resilience. Our findings illustrate that adaptability culture is associated with lower measures of expected and actual default.

All told, the results of this thesis have significant policy implications since it signals that corporate culture is able to affect important outcomes in the field of corporate finance.