Measuring Corporate Culture Using Machine Learning

TLDR

The study develops a culture dictionary from 209,480 earnings call transcripts using a word‑embedding machine learning model. The authors score five cultural values—innovation, integrity, quality, respect, and teamwork—across 62,664 firm‑year observations from 2001 to 2018 using the constructed dictionary. The analysis shows that an innovative culture is broader than traditional R&D or patent metrics, correlates positively with operational efficiency, risk‑taking, earnings management, executive compensation, firm value, and deal making—especially during downturns—and that major events like mergers and acquisitions influence corporate culture.

Abstract

Abstract We create a culture dictionary using one of the latest machine learning techniques—the word embedding model—and 209,480 earnings call transcripts. We score the five corporate cultural values of innovation, integrity, quality, respect, and teamwork for 62,664 firm-year observations over the period 2001–2018. We show that an innovative culture is broader than the usual measures of corporate innovation – R&D expenses and the number of patents. Moreover, we show that corporate culture correlates with business outcomes, including operational efficiency, risk-taking, earnings management, executive compensation design, firm value, and deal making, and that the culture-performance link is more pronounced in bad times. Finally, we present suggestive evidence that corporate culture is shaped by major corporate events, such as mergers and acquisitions.