Market Manipulation and Corporate Culture

Abstract

We propose that market manipulation, which brings about managerial short-termism, shareholder awareness and changes in risk preferences, and an opaque environment, has a negative causal impact on the four dimensions of corporate culture: create, compete, and control orientations of the corporate culture. We test this proposition by matching corporate culture dimensions from textual analysis of 10-K reports to suspected cases of market manipulation using NASD surveillance software for all US publicly traded firms. The data indicate market manipulation consistently negatively affects the corporate culture dimensions in subsequent years, and this effect is not temporary. We propose shareholder activism and reduced corporate risk-taking to be the potential channels of the relationship. However, the presence of common ownership moderates the impact of market manipulation on corporate culture by improving corporate governance and reducing information costs. The results are robust using different identification strategies, alternative model specifications, and adjustments for potential endogeneity.

Keywords: Market Manipulation, Misconduct, Corporate Culture

JEL Classification: G14, G34, M14