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Measuring Corporate Culture Using Machine Learning

Journal: Review of Financial Studies

Date: 20210701

Author: Li, Kai; Mai, Feng; Shen, Rui; Yan, Xinyan

Abstract:
We create a culture dictionary using one of the latest machine learning techniques--the word embedding model--and 209,480 earnings call transcripts. We score the five corporate cultural values of innovation, integrity, quality, respect, and teamwork for 62,664 firm-year observations over the period 2001-2018. We show that an innovative culture is broader than the usual measures of corporate innovation--R&D expenses and the number of patents. Moreover, we show that corporate culture correlates with business outcomes, including operational efficiency, risk-taking, earnings management, executive compensation design, firm value, and deal making, and that the culture-performance link is more pronounced in bad times. Finally, we present suggestive evidence that corporate culture is shaped by major corporate events, such as mergers and acquisitions.

Link: Google Scholar

Key Findings

Corporate Culture Measurement

New machine learning approach using word embedding model analyzed 209,480 earnings call transcripts to measure five key corporate cultural values: innovation, integrity, quality, respect, and teamwork.

Culture-Performance Link

Strong corporate culture correlates with improved operational efficiency, appropriate risk-taking, reduced earnings management, and higher firm value, especially during challenging times.

M&A Cultural Impact

Corporate culture influences merger decisions - firms closer in cultural values are more likely to merge, and post-merger culture reflects both acquirer and target firm values.

Cultural Values Impact on Business Performance

  • Firms with strong culture show 5.2% higher assets turnover
  • Strong culture associated with 2.4% higher monthly returns during financial crisis
  • 4.4% higher Tobin's q for firms with strong corporate culture

Corporate Cultural Values Distribution

  • Innovation is the most frequently mentioned cultural value (mean: 1.737)
  • Integrity shows lowest frequency (mean: 0.584)
  • Quality, respect, and teamwork show moderate frequencies

Cultural Impact on M&A Activity

  • Innovation (+0.68%) and respect (+2.38%) increase likelihood of being acquirer
  • Integrity (-2.34%) and quality (-1.13%) decrease likelihood of being acquirer
  • Cultural similarity increases merger probability by 3.18%

Contribution and Implications

  • First large-scale empirical measurement of corporate culture using machine learning techniques
  • Demonstrates quantifiable link between corporate culture and business performance
  • Provides new methodology for measuring intangible corporate attributes through textual analysis
  • Offers practical insights for merger decisions and cultural integration strategies

Data Sources

  • Performance metrics derived from Table 7, Panel A showing impact of strong culture on business outcomes
  • Cultural values distribution based on Table 3, Panel A summary statistics
  • M&A impact data sourced from Table 8, Panel A showing cultural values' effect on acquisition likelihood