The value of corporate culture…

Luigi Guiso, Paola Sapienzaa and Luigi Zingales have this interesting paper on the role of culture in a firm.

They say culture matters:

After resigning from Goldman, Greg Smith claimed that a culture of integrity was “the secret sauce” that made Goldman great. He also claimed that this culture had deteriorated since the IPO. While we are unable to test his claims directly, we study whether on average a culture of integrity adds value and whether on average this culture is weaker among publicly traded companies. We find both these statements to be true. Integrity is positively correlated with financial performance and attractiveness of job offerings, while it is negatively correlated with the degree of unionization. In the GPTW sample we also find that publicly traded companies are less able to sustain a high level of integrity.

With few notable exceptions, the finance literature has ignored the role corporate culture can play. This is especially surprising more than 25 years after the “incomplete contract” revolution (Grossman and Hart, 1986). If contracts are incomplete, values can definitely play a role in ameliorating the inefficiencies created by the incompleteness in the contractual environment and the finance literature has to realize it. More importantly, this paper shows that a company’s financial choices have consequences on the corporate culture too, an aspect which is generally ignored in the finance literature.

We are fully aware that this is just a first cut at this very difficult, but important problem. The only way to convincingly prove a causal effect of integrity on performance is through a field experiment. Yet, given the costs and complexity of setting up these experiments, the first necessary step is to understand the potential sources of this link and show that they appear to be present in the data. We regard our study as this first step.


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