Trust, But Verify: MD&A Language and the Role of Trust in Corporate Culture
University of Notre Dame - Mendoza College of Business
University of Notre Dame
University of Notre Dame - Mendoza College of Business - Department of Finance
February 3, 2015
Trust is ethically important and essential for business, but difficult to measure. Several papers hypothesize that increasing its role within a corporation will lessen the need for external monitoring and contracts. To assess this, we need a way to gauge whether a firm has a trusting corporate culture. This paper provides one way to do that objectively. We develop a measure of trust in a firm’s corporate culture by counting the number of times 21 trust-related words appear in an important kind of document: the Management Discussion and Analysis section of the annual report. We report two significant findings: that, contrary to what one might think, firms with a trusting culture frequently use audit and control-type words and that trust is positively linked with subsequent share price volatility. We propose explanations of both findings.
Number of Pages in PDF File: 32
Keywords: Trust; ethics; corporate culture; corporate governance; audit; disclosures; textual analysis; monitoring
Date posted: August 16, 2014 ; Last revised: February 5, 2015
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