Corporate culture and shareholder litigation rights: evidence from a quasi-natural experiment and textual analysis

Abstract

Purpose

Taking advantage of an innovative measure of corporate culture obtained from advanced machine learning and textual analysis, we investigate how corporate culture is influenced by shareholder litigation rights, which are widely recognized as a crucial external governance mechanism. The innovative measure of corporate culture is based on a textual analysis of over 200,000 earnings call transcripts.

Design/methodology/approach

To mitigate endogeneity and thus demonstrate causality, we exploit a quasi-natural experiment based on the staggered passage of universal demand laws, which reduce shareholder litigation rights. The enactment of state-level legislation is likely exogenous to individual firms’ characteristics as it is beyond the control of any given firm. Following the literature, we employ a difference-in-difference analysis, supplemented by several robustness checks, i.e. propensity score matching and entropy balancing.

Findings

Our difference-in-difference estimates show that an exogenous reduction in shareholder litigation rights weakens corporate culture considerably. Specifically, corporate culture is 12.74–14.41% weaker after the implementation of universal demand laws. Our results corroborate the hypothesis that a decline in litigation risk exacerbates agency problems, discouraging self-interested managers from taking actions that enhance shareholder value in the long run, such as cultivating a strong corporate culture.

Originality/value

Our study is the first to explore how corporate culture is affected by shareholder litigation risk, which constitutes a vital external governance mechanism. Moreover, we utilize an innovative measure of corporate culture based on sophisticated textual analysis. Finally, we employ a quasi-natural experiment based on an exogenous shock, making it more likely that our conclusion reflects a causal influence rather than merely a correlation.

Citation

Ongsakul, V., Chintrakarn, P. and Jiraporn, P. (2025), "Corporate culture and shareholder litigation rights: evidence from a quasi-natural experiment and textual analysis", Review of Behavioral Finance, Vol. 17 No. 1, pp. 19-38. https://doi.org/10.1108/RBF-04-2024-0123