A Corporate Culture Channel: How Increased Shareholder Governance Reduces Firm Value
Jillian A. Popadak
University of Pennsylvania - The Wharton School
October 25, 2013
I show corporate culture is an important channel through which shareholder governance affects firm value. I develop a novel data set to measure aspects of corporate culture and use a regression discontinuity strategy to demonstrate stronger shareholder governance significantly changes aspects of culture. I find greater results-orientation but less customer-focus, integrity, and collaboration. Consistent with a positive link between governance and value, shareholders initially realize financial gains: increases in sales, profitability, and payout occur. However, over time, I find intangible assets associated with customer satisfaction and employee integrity deteriorate, which partly reverses the gains from greater results-orientation. These findings are consistent with a model of multitasking where stronger governance incentivizes managers to concentrate on easy-to-observe benchmarks at the expense of the harder-to-measure intangibles, even though such actions are not in the firm's best long-term interest. On average, I find firm value declines 1.4% through this corporate culture channel. I use an instrumental variable design and interventions by activist hedge funds to test the external validity of the inferences. Across these complementary research designs, I consistently find strong support for the economic importance of a corporate culture channel.
Number of Pages in PDF File: 85
Keywords: Corporate Governance, Intangible Assets, Corporate Culture, Hedge Fund Activism, Managerial Myopia, Multitasking
JEL Classification: D23, G23, G30, K22, M14, O16working papers series
Date posted: October 27, 2013 ; Last revised: March 4, 2014
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