Corporate Culture

Paper Session

Saturday, Jan. 7, 2017 8:00 AM – 10:00 AM

Sheraton Grand Chicago, Sheraton Ballroom III
Hosted By: American Finance Association
  • Chair: Christopher Parsons, University of California-San Diego

Bank Culture

Anjan Thakor
,
Washington University-St. Louis
Fenghua Song
,
Pennsylvania State University

Abstract

We develop a model in which bank culture improves upon outcomes attainable with incentive contracting. The bank designs a second-best incentive contract to induce the desired managerial effort allocation across growth and safety, but this induces excessive growth relative to the first best, a distortion exacerbated by interbank competition. Bank culture has two effects: it matches managers to banks with similar beliefs, and a safety-oriented culture reduces the competition-induced excessive growth focus. Culture is also contagious - a safety-oriented culture in some banks causes others to follow suit - this effect strengthens with higher bank capital and weakens with stronger safety nets.

Integrity Culture and Analyst Forecast Quality

Joseph Pacelli
,
Indiana University

Abstract

This study examines the relationship between financial institutions’ integrity culture and analysts’ forecast accuracy. Integrity culture represents the extent to which norms and values within a financial institution promote high ethical standards and honesty. Using data collected from the Financial Industry Regulatory Authority (FINRA), I measure the weakness of integrity culture in financial institutions based on security code violations arising in business areas unrelated to equity research. I find that FINRA violations are associated with lower quality forecasts, and that these results are robust to a host of alternative explanations, including poor internal controls, weak governance, and other cultural forces. Specifically, violations are associated with less accurate, more strategically biased and less informative earnings forecasts. This study sheds light on how cultural forces can influence the behavior of security analysts.

A Clash of Cultures: The Governance and Valuation Effects of Multiple Corporate Cultures

Stephen Ferris
,
University of Missouri
Narayanan Jayaraman
,
Georgia Institute of Technology
Teng Zhang
,
Georgia Institute of Technology

Abstract

This study investigates the effect of multiple corporate cultures on governance and valuation with the firm. Estimating cultural distance measures between the CEO and the board and between the CEO and stakeholders, we find significant effects on both CEO turnover and firm values. We find that increased cultural distance is associated with greater CEO turnover, but also with higher firm values. These findings are consistent with the view that greater cultural distance between a CEO and the board results in less empathy and acceptance. But it also stimulates greater monitoring and increased firm value. We also discover a cultural persistence in the hiring of successor CEOs with 89.8% of our sample CEOs replaced by culturally identical individuals.

Corporate Culture: Evidence From the Field

John Graham
,
Duke University
Campbell Harvey
,
Duke University
Jillian Popadak
,
Duke University
Shivaram Rajgopal
,
Columbia University

Abstract

We use interviews and a novel survey tool to study corporate culture at more than 1,300 North American firms. More than 90% of executives believe that culture is important or very important at their firms and 92% believe improving culture would increase firm value. Only 16% believe their firm's culture is exactly where it should be. Executives link culture to ethical choices (including compliance and short-termism), innovation (creativity, taking on appropriate business risk), and value creation (productivity, acquisition premia) at their firms. We study these issues within a framework that implies that the effectiveness of corporate culture is determined not just by stated cultural values but also by whether employees act according to social norms that are consistent with the values, and whether formal institutions such as governance reinforce the values. Key cultural values include integrity, collaboration, and adaptability.
Discussant(s)
Adi Sunderam
,
Harvard Business School
William Mayew
,
Duke University
Paul Smeets
,
Maastricht University
Kelly Shue
,
University of Chicago
JEL Classifications
  • G3 - Corporate Finance and Governance