Causes and Consequences of Corporate Culture

December 8-9, 2011
Luigi Zingales, University of Chicago, and James Poterba, MIT, Organizers

Serguey Braguinsky, Carnegie Mellon University, and Sergey V. Mityakov, Clemson University
Foreign Corporations and the Culture of Transparency: Evidence from Russian Administrative Data

Foreign-owned firms from advanced countries carry the culture of transparency in business transactions that is orthogonal to the culture of hiding and insider dealing in many developing economies and economies in transition. Braguinsky and Mityakov document this using administrative data on reported earnings and market values of cars owned by workers employed in foreign-owned and domestic firms in Moscow, Russia. They examine whether closer ties to foreign corporations result in the diffusion of transparency to private Russian firms. They find that Russian firms initially founded in partnerships with foreign corporations are twice as transparent in reported earnings of their workers as other Russian firms, but they are still less than half as transparent as foreign firms themselves. They also find that increased links to foreign corporations, such as hiring more workers from them, raise the transparency of domestic firms. An important channel for this transmission appears to be the need to keep official wages and salaries of incumbent workers close to wages that domestic firms have to pay to their newly hired workers with experience in multinationals.

Yan-Leung Cheung and Aris Stouraitis, Hong Kong Baptist University, and Raghavendra Rau, University of Cambridge
Which Firms Benefit from Bribes, and by How Much? Evidence from Corruption Cases Worldwide

Cheung, Rau, and Stouraitis analyze a hand-collected sample of 166 prominent bribery cases, involving 107 publicly listed firms from 20 stock markets that have been reported to have bribed government officials in 52 countries worldwide during 1971-2007. They focus on the initial date of award of the contract for which the bribe was paid (rather than of the revelation of the bribery). The data enable them to describe in detail the mechanisms through which bribes affect firm value. They find that firms that win contracts by paying bribes under-perform their peers for up to three years before after winning the contract for which the bribe was paid. Firm performance, the rank of the politicians bribed, as well as bribe-paying and bribe-taking country characteristics affect the magnitude of the bribes and the benefits that firms derive from them.

Jason M. DeBacker, Department of the Treasury, and Bradley Heim and Anh Tran, Indiana University
Importing Corruption Culture from Overseas: Evidence from Corporate Tax Evasion in the United States

DeBacker, Heim, and Tran study how cultural norms and enforcement policies influence illicit corporate activities. Using confidential IRS audit data, they show that corporations with owners from countries with higher corruption norms engage in higher amounts of tax evasion in the United States. This effect is strong for small corporations and decreases as the size of the corporation increases. In the mid-2000s, the United States implemented several enforcement measures that significantly increased tax compliance. However, the researchers find that these enforcement efforts were less effective in reducing tax evasion by corporations whose owners are from countries with higher corruption norms. This suggests that cultural norms can be a challenge to legal enforcement.

Lee Biggerstaff and Andy Puckett, University of Tennessee, and David C. Cicero, University of Delaware
Unethical Executives and Corporate Misbehavior

Biggerstaff, Puckett, and Cicero provide evidence that unethical executives (CEOs and CFOs) manage their firms in unethical ways. They identify executives of questionable ethical character as those who appear to have systematically engaged in stock option backdating and test whether these executives lead their firms to engage in other suspect corporate activities. With respect to financial reporting, they find that the firms that unethical executives manage are more likely to just meet or beat analyst forecasts and have larger discretionary accruals. To help establish causality, they implement a difference-in-differences approach and find a significant increase in the propensity to meet or narrowly beat analysts' earnings forecasts after unethical executives join their firms. Unethical executives are also more likely to use corporate resources for personal gain, in that they make more acquisitions and their acquisition announcements are met by lower stock market reactions. The differential market response is concentrated in acquisitions of private targets, whose opaqueness may provide suspect executives with greater flexibility to divert corporate resources or hide accounting irregularities.

Robert Davidson, Georgetown University; Aiyesha Dey, University of Minnesota; and Abbie Smith, University of Chicago
Executives' Off-The-Job Behavior, Corporate Culture, and Financial Reporting Risk

Davidson, Dey, and Smith examine how and why two aspects of CEO behavior outside the workplace, as measured by prior legal infractions and the ownership of luxury goods, are related to the likelihood of misstated financial statements, including fraud and material reporting errors. They interpret an executive's prior record of legal infractions, including charges of driving under the influence, other drug related charges, domestic violence, reckless behavior, disturbing the peace, and speeding tickets, as a symptom of a relatively low regard for laws and a lack of self-control. Hence they predict and find that record holders have a relatively high propensity to perpetrate fraud. They interpret an executive's prior ownership of luxury goods as a symptom of low frugality. They then predict and find that the risk of fraudulent corporate reporting, the risk that other insiders are named in perpetrating fraud, and the risk of unintentional reporting errors increase over the tenure of "unfrugal CEOs", consistent with a deterioration in the culture/control environment. Also consistent with a loosening of the culture, they find a decline in measures of board monitoring intensity and an increase in the equity-based incentives of top executives during the tenure of unfrugal CEOs, and some evidence that these changes distinguish fraud from non-fraud years of the fraud sample. Further, unfrugal CFOs are more likely to be appointed by unfrugal CEOs than by frugal CEOs, and the relation between CFO type and fraud risk is more pronounced in firms run by unfrugal CEOs, consistent with a relatively weak control environment. Finally, they find a positive relation between less egregious earning management and CEOs' prior records and asset ownership, providing additional assurance that our results are not driven by a potential relation between executive type and SEC detection or enforcement.

Dhananjay Nanda and Peter Wysocki, University of Miami School of Business
The Relation between Trust and Accounting Quality

Using a sample of 43 countries, Nanda and Wysocki examine the association between societal trust and firms' voluntary and regulated financial reporting and disclosure quality. They explore two competing predictions. On one hand, societal trust and voluntary reporting quality are predicted to have a negative association if greater trust lowers stakeholders' demand for information. Similarly, a predicted negative association would arise for regulated reporting requirements if greater trust lowers stakeholders' demand for regulation. On the other hand, societal trust and reporting quality are predicted to have a positive association if stakeholders perceive firms' disclosures as more credible in high trust environments thereby increasing stakeholders' demand for information. The researchers document a robust positive empirical relation between societal trust and measures of voluntary accounting quality, but find no association between societal trust and regulated reporting requirements.

Robert G. Eccles and George Serafeim, Harvard University, and Ioannis Ioannou, London Business School
The Impact of a Corporate Culture of Sustainability on Corporate Behavior and Performance

Eccles, Ioannou, and Serafeim investigate the effect of a corporate culture of sustainability on multiple facets of corporate behavior and performance outcomes. Using a matched sample of 180 companies, they find that corporations that voluntarily adopted environmental and social policies many years ago - termed as High Sustainability companies - exhibit fundamentally different characteristics from a matched sample of firms that adopted almost none of these policies - termed as Low Sustainability companies. In particular, they find that the boards of directors of these companies are more likely to be responsible for sustainability and top executive incentives are more likely to be a function of sustainability metrics. Moreover, they are more likely to have organized procedures for stakeholder engagement, to be more long-term oriented, and to exhibit more measurement and disclosure of non-financial information. Finally, they provide evidence that High Sustainability companies significantly outperform their counterparts over the long term, both in terms of stock market and accounting performance. The out-performance is stronger in sectors where the customers are individual consumers instead of companies, companies compete on the basis of brands and reputations, and products significantly depend upon extracting large amounts of natural resources.

Nicholas Bloom, Stanford University and NBER; Raffaella Sadun, Harvard University and NBER; and John Van Reenen, London School of Economics and NBER
The Organization of Firms across Countries

Bloom, Sadun, and Van Reenen argue that social capital, as proxied by trust, increases aggregate productivity by affecting the organization of firms. To do this they collect new data on the decentralization of investment, hiring, production, and sales decisions from Corporate Headquarters to local plant managers in almost 4,000 firms in the United States, Europe, and Asia. They find that firms headquartered in high trust regions are more likely to decentralize, with trust accounting for about half of the variation in decentralization in our data. To help identify causal effects, they look within multinational firms, and show that higher levels of bilateral trust between the multinational's country of origin and subsidiary's country of location increases decentralization, even after instrumenting trust using religious similarities between the countries. Finally, they show that trust raises aggregate productivity by facilitating reallocation between firms and allowing more efficient firms to grow, as CEOs can decentralize more decisions.

Mary Margaret Frank and Luann Lynch, University of Virginia; Sonja Olhoft Rego, Indiana University; and Rong Zhao, Drexel University
Are Aggressive Reporting Practices Indicative of an Aggressive Corporate Culture?

Frank, Lynch, Rego, and Zhao examine whether firms with aggressive financial and tax reporting (that is., aggressive reporting firms) have other aggressive corporate practices, consistent with these firms possessing an aggressive corporate culture. The authors focus on investing and financing policies that prior research has linked to managerial risk-taking. Iinitially they focus on the pre-SOX time period (1994-2000), when stock prices surged and aggressive corporate practices were evident at many firms. Their analyses provide evidence that firms with aggressive reporting in the pre-SOX time period also maintained other aggressive policies, including greater capital expenditures, more frequent acquisitions, higher leverage, lower interest coverage, larger debt and equity securities issuance, greater reliance on short-term debt, and larger cash holdings and dividend yields. However, the results also suggest that SOX significantly altered the systematic associations between aggressive reporting and other corporate policies during the post-SOX time period (2003-7) relative to the changes of other firms, consistent with SOX dampening previously aggressive corporate cultures. Finally, the preliminary valuation tests provide little evidence that firms with aggressive reporting in either the pre- or post-SOX time period were valued at a premium relative to firms with average reporting behaviors.

Leonce Bargeron, Kenneth M. Lehn, and Jared Smith, University of Pittsburgh
Corporate Culture and M&A Activity

Bargeron, Lehn, and Smith examine the relation between the quality of a firm's corporate culture and its merger and acquisition activity. Using a sample of firms that have been ranked publicly as having strong corporate cultures, they find several notable results. Although the volume of M and A activity does not differ significantly for firms with strong cultures as compared with other firms,the relative size of acquisitions announced by firms with strong cultures is significantly smaller than those announced by other firms, which is consistent with the view that large acquisitions pose significant risk for acquiring firms with strong corporate cultures. Furthermore, when firms with strong cultures announce relatively large acquisitions, bidder returns and the percent change in the combined values of bidders and targets are significantly less than the corresponding returns for other firms that announce large acquisitions. Finally, when firms with strong cultures make large acquisitions, they are significantly more likely to lose their ranking as compared with strong culture firms that do not make large acquisitions. Overall, these results are consistent with the conclusion that corporate culture affects the M and A policies of firms.

Luigi Guiso, European University Institute; Paola Sapienza, Northwestern University and NBER; and Luigi Zingales, University of Chicago and NBER
The Value of Corporate Values

Guiso, Sapienza, and Zingales analyze the values advertised on the company website and those shared by its employees for a sample of large U.S. companies. They find that 85 percent of firms post some corporate values, with innovation and integrity being the most frequently stated ones. Larger firms tend to advertise values more while firms who invest more in R and D are more likely to advertise innovation. Yet, advertised values are uncorrelated with values shared by the employees of the firms and even its managers. The values shared by the employees, not the advertised ones, are positively correlated with a company's financial performance, Tobin's q, customer satisfaction, and quality of labor relations. These results raise the question of how these better values are established. The only evidence here is that publicly listed firms have worse values.

NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us