Tournament Culture and Corporate Misconduct : Evidence using Machine Learning

Abstract

This paper examines the type of firm culture which leads to corporate misconduct activities. Using the management’s tone in the 10-K report as a proxy for culture, we find that higher internal “compete” culture (aka tournament culture) increases the firm specific risk and hence, such a corporate culture is associated with corporate misconduct activities such as restatements, earnings management, and accounting fraud. The results are robust to external validity tests, firm-specific systematic risk, market competition, governance characteristics, CEO effects, and endogeneity concerns.

Keywords: Corporate Culture; Firm Risk; Corporate Misconduct; Text Analysis

JEL Classification: M14, D22