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This study investigates how firm-specific exposure to COVID-19 influences capital structure choices, a topic of significant importance due to the pandemic’s unprecedented economic disruption. We leverage a novel text-based measure of firm-specific COVID exposure to explore these dynamics.

Our research adopts an innovative text-based approach to measure firm-specific COVID exposure, developed by prior studies, which analyzes earnings conference call transcripts using advanced machine learning algorithms. The analysis is based on a comprehensive sample of US firms spanning over 20 years. Various statistical techniques, including firm-fixed effects, propensity score matching, entropy balancing and instrumental-variable analysis, are employed to ensure robust results.

Our findings indicate that firms with higher COVID exposure significantly alter their leverage, favoring debt financing over equity financing. This effect is less pronounced in larger and more profitable firms as well as those more vulnerable to climate change risk. The unique impact of COVID on leverage is contrasted with other infectious diseases, which do not exhibit similar effects.

Our study’s originality lies in its application of a novel text-based metric, borrowed from existing research, to measure firm-specific COVID exposure, marking a significant advancement in the field. This method provides a timely and precise assessment of exposure, offering insights that traditional metrics cannot capture. It is the first study to document the significant role of COVID exposure in determining corporate leverage, enhancing the understanding of capital structure dynamics in the context of unprecedented global disruptions.

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.

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.

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.

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.