Scandinavian Working Papers in Economics

SIFR Research Report Series,
Institute for Financial Research

No 48: Does Corporate Culture Matter for Firm Policies?

Henrik Cronqvist (), Angie Low and Mattias Nilsson
Additional contact information
Henrik Cronqvist: The Ohio State University, Postal: Fisher College of Busiess, Department of Finance, 840 Fisher Hall, 2100 Neil Avenue, Columbus, OH 43210, USA
Angie Low: The Ohio State Unversity
Mattias Nilsson: Worcester Polytechnic Institute

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.

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

JEL-codes: G32; G34; G35; L22; L25; Z10

48 pages, February 15, 2007

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