Fuxiu Jiang, Kenneth A. Kim, Yunbiao Ma, John R. Nofsinger & Beibei Shi

Journal of Business Ethics volume 154, pages425–439(2019)

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Corporate culture has received a tremendous amount of attention in the management literature, and recently also in the economics and finance literatures. In this paper, we study whether corporate culture can influence external transaction costs. Specifically, we show how corporate integrity may be able to mitigate credit frictions, and thus reduce firms’ investment-cash flow sensitivities. Firms with a culture of high integrity have employees and managers who are trustworthy, motivated, self-governing, and not self-serving. External stakeholders, including creditors, may perceive such firms as likely to honor contracts, adhere to regulations, and respect their needs and rights as stakeholders. Therefore, firms with a culture of high integrity may not need to hoard cash to finance their investments or only invest when cash flow is high.

About the author

Fuxiu Jiang, School of Business, Renmin University of China

Kenneth A. Kim, Professor, Tongji SEM

Yunbiao Ma, School of Business, Renmin University of China

John R. Nofsinger, College of Business and Public Policy, University of Alaska Anchorage

Beibei Shi, School of International Trade and Economics, University of International Business and Economics

 Keywords

corporate culture; integrity; investment-cash flow sensitivity

Brief introduction

Can firms overcome credit constraints with a corporate culture of high integrity? We empirically address this question by studying their investment-cash flow sensitivities. We identify firms with a culture of integrity through textual analysis of public documents in a sample of Chinese listed firms and also through corporate culture statements. Our results show that firms with an integrity-focused culture have lower investment-cash flow sensitivity, even after we address endogeneity concerns. However, we also find that for the culture to reduce the investment-cash flow sensitivity, external stakeholders must be able to verify this culture through a low information asymmetry environment. Overall, our findings show that a corporate culture of high integrity can mitigate a firm’s external transaction costs.