Trust, But Verify: MD&A Language and the Role of Trust in Corporate Culture

32 Pages Posted: 16 Aug 2014 Last revised: 17 Apr 2015

Robert Audi

University of Notre Dame - Mendoza College of Business

Tim Loughran

University of Notre Dame

Bill McDonald

University of Notre Dame - Mendoza College of Business - Department of Finance

Date Written: April 16, 2015

Abstract

Trust is both ethically important and essential for business but difficult to measure. This paper contributes toward clarifying the nature of trust in a way that is both conceptually helpful for ethical inquiries concerning business and pertinent to the measurement of trust as an element in organizations. Several papers hypothesize that increasing the role of trust in a corporation reduces the need for external monitoring and contracts. Assessing this important hypothesis requires a way to gauge whether a firm has a trusting corporate culture. We develop an objective measure of trust in a firm’s corporate culture by counting the number of times 21 trust-related words appear in an important kind of document: the Management Discussion and Analysis section of the annual report. We report two significant findings: that, contrary to what one might think, firms with a trusting culture frequently use audit and control-type words and that trust is positively linked with subsequent share price volatility. We propose explanations of these findings with the hope of facilitating the objective measurement of trust and enhancement of a trusting atmosphere in corporate culture.

Keywords: Trust; ethics; corporate culture; corporate governance; audit; disclosures; textual analysis; monitoring

Suggested Citation

Audi, Robert and Loughran, Tim and McDonald, Bill, Trust, But Verify: MD&A Language and the Role of Trust in Corporate Culture (April 16, 2015). Forthcoming in the Journal of Business Ethics. Available at SSRN: https://ssrn.com/abstract=2480766

Robert Audi

University of Notre Dame - Mendoza College of Business ( email )

Notre Dame, IN 46556-5646
United States

Tim Loughran (Contact Author)

University of Notre Dame ( email )

Department of Finance
245 Mendoza College of Business
Notre Dame, IN 46556-5646
United States
574-631-8432 (Phone)
574-631-5255 (Fax)

Bill McDonald

University of Notre Dame - Mendoza College of Business - Department of Finance ( email )

P.O. Box 399
Notre Dame, IN 46556-0399
United States

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