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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

Background and Context

Research Focus

The study creates a culture dictionary using word embedding models and machine learning to analyze 209,480 earnings call transcripts and measure corporate cultural values.

Cultural Values Examined

The research examines five key corporate cultural values: innovation, integrity, quality, respect, and teamwork across 62,664 firm-year observations from 2001-2018.

Methodology

The study uses word2vec machine learning models to analyze earnings call transcripts, focusing on question-and-answer sections to capture authentic cultural expressions rather than scripted content.

Prevalence of Different Cultural Values in Corporate Communications

  • Innovation emerges as the most frequently discussed cultural value in corporate communications
  • Integrity shows the lowest frequency among the five cultural values measured
  • Quality ranks second in frequency, followed by respect and teamwork

Impact of Strong Corporate Culture on Business Performance

  • Strong corporate culture positively correlates with operational efficiency metrics
  • Companies with strong culture show higher inventory turnover and assets turnover
  • Strong culture is associated with increased CEO pay duration, indicating longer-term orientation

Cultural Values' Performance During Crisis Periods

  • Companies with strong culture showed better resilience during crisis periods
  • Strong culture firms experienced 2.4% higher monthly returns during the financial crisis
  • Cultural strength provided competitive advantage during challenging times

Post-Merger Cultural Integration Success

  • Post-merger cultural values show significant correlation with both acquirer and target pre-merger values
  • Innovation and quality values show strongest persistence post-merger
  • Evidence suggests successful cultural integration in merged entities

Contribution and Implications

  • First large-scale measurement of corporate culture using machine learning and natural language processing
  • Demonstrates that corporate culture significantly influences business outcomes and decision-making
  • Provides evidence that corporate culture can be shaped by major corporate events like mergers

Data Sources

  • Cultural Values Chart: Based on Table 3, Panel A summary statistics
  • Performance Metrics Chart: Based on Table 7, Panel A business outcomes data
  • M&A Impact Chart: Based on Table 8, Panel A coefficients
  • Crisis Performance Chart: Based on Table 7, Panel B abnormal returns
  • Cultural Integration Chart: Based on Table 8, Panel C post-merger values