Corporate Culture and Stock Return Comovement

This paper investigates the relationship between corporate culture and firms’ stock return comovement. To do so, we conduct a textual analysis of firms’ 10-K reports and employ the bag-of-words methodology to capture a firm’s corporate culture based on the Denison Model. Following this, we hypothesize and find that a positive (negative) and significant relationship exists between firms’ external (internal) culture and stock return comovement. Furthermore, we find that the relationship between corporate culture and return comovement reverses during periods of crisis; namely the Covid-19 pandemic and the Global Financial Crisis. More importantly, our findings are novel and have interesting policy implications, since they identify, for the first time, firms’ corporate culture as relevant to determining the comovement of stock returns; hence, we argue that corporate culture should be incorporated in the diversification strategies of investors.