When corporate culture matters: The case of stakeholder violations

Abstract

This study examines whether and how a strong corporate culture influences stakeholder violations. Using a longitudinal sample of monetary penalties imposed on US-listed firms for stakeholder violations, I find evidence that a strong corporate culture is significantly and negatively associated with such violations. This outcome remains robust to a series of robustness and endogeneity tests, including the application of the generalized method of moments (GMM), entropy balancing, and propensity score matching (PSM) estimation. The channel analysis evidence implies that information asymmetry is a possible mechanism through which a strong corporate culture is associated with stakeholder violations. A cross-sectional analysis demonstrates that the documented association between strong corporate culture and stakeholder violations is stronger for companies with weak external monitoring. Additionally, the negative association between strong corporate culture and stakeholder violations varies across violation types and cultural dimensions. This study contributes to the ongoing discourse on the role of informal corporate governance mechanisms (corporate culture) in mitigating corporate stakeholder violations. Finally, it has important implications for stakeholders, including policymakers, regulators, and practitioners, intending to promote responsible business practices.