A Clash of Cultures: The Governance and Valuation Effects of Corporate Cultural Distance

67 Pages Posted: 20 Dec 2021

See all articles by Stephen Ferris

Stephen Ferris

Ball State University

Narayanan Jayaraman

Georgia Institute of Technology - Scheller College of Business

Tim Zhang

University of Wyoming, College of Business

Date Written: December 5, 2021

Abstract

We find that the cultural distance between the CEO and a firm’s directors increases the sensitivity of CEO turnover and compensation to performance while enhancing shareholder value. This effect is concentrated in the cultural distance between the CEO and independent directors. More culturally distant CEOs adopt less risky financial and operating policies. To establish causality, we use the sudden exit of directors as a source of exogenous change in cultural distance. Overall, our results suggest that cultural distance increases information collection costs. This causes the board to monitor with increased rigor and to rely on “hard” information to assess CEO performance.

Keywords: Governance; boards; cultural distance; turnover; compensation

JEL Classification: G34

Suggested Citation

Ferris, Stephen and Jayaraman, Narayanan and Zhang, Tim, A Clash of Cultures: The Governance and Valuation Effects of Corporate Cultural Distance (December 5, 2021). Georgia Tech Scheller College of Business Research Paper No. 3988813, Available at SSRN: https://ssrn.com/abstract=3988813 or http://dx.doi.org/10.2139/ssrn.3988813

Stephen Ferris

Ball State University ( email )

Muncie, IN 47306-0340
United States

Narayanan Jayaraman

Georgia Institute of Technology - Scheller College of Business ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States
404-894-4389 (Phone)
404-894-6030 (Fax)

Tim Zhang (Contact Author)

University of Wyoming, College of Business

1000 E. University Avenue
Department 3275
Laramie, WY 82071
United States

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