Tournament Culture and Corporate Misconduct : Evidence using Machine Learning

Abstract

This paper examines the type of corporate culture that leads to misconduct activities. Taking the management's tone in the 10-K report as the culture, we found that a higher internal compete culture (or tournament culture) increases the rate of misconduct activities such as restatements, earnings management, and financial fraud. A 1% change in tournament culture increases the chance of misconduct activities by 5% due to the firm's idiosyncratic risk. We externally validate culture measures using the company's Glassdoor rating, CSR score, and other cultural proxies. The results are robust regarding systematic risk, market competition, governance characteristics, CEO effects, and endogeneity effects.