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Does Corporate Culture Matter for Firm Policies?

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Author Info

  • Cronqvist, Henrik

    ()
    (The Ohio State University)

  • Low, Angie

    (The Ohio State Unversity)

  • Nilsson, Mattias

    (Worcester Polytechnic Institute)

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    Abstract

    Economic theories suggest that a firm's corporate culture matters for its policy choices. We construct a parent-spinoff firm panel dataset that allows us to identify culture effects in firm policies from behavior that is inherited by a spinoff firm from its parent after the firms split up. We find positive and significant relations between spinoff firms' and their parents' choices of investment, financial, and operational policies. Consistent with predictions from economic theories of corporate culture, we find that the culture effects are long-term and stronger for internally grown business units and older firms. Our evidence also suggests that firms preserve their cultures by selecting managers who fit into their cultures. Finally, we find a strong relation between spinoff firms' and their parents' profitability, suggesting that corporate culture ultimately also affects economic performance. These results are robust to a series of robustness checks, and cannot be explained by alternatives such as governance or product market links. The contribution of this paper is to introduce the notion of corporate culture in a formal empirical analysis of firm policies and performance.

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    Bibliographic Info

    Paper provided by Institute for Financial Research in its series SIFR Research Report Series with number 48.

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    Length: 48 pages
    Date of creation: 15 Feb 2007
    Date of revision:
    Handle: RePEc:hhs:sifrwp:0048

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    Keywords: Economics of corporate culture; firm policies; firm performance;

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    References

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    Cited by:
    1. Armstrong, Christopher S. & Blouin, Jennifer L. & Larcker, David F., 2012. "The incentives for tax planning," Journal of Accounting and Economics, Elsevier, vol. 53(1), pages 391-411.

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