Fiduciary Duty of Loyalty and Corporate Culture

Abstract

We investigate the effect of fiduciary duty of loyalty on corporate culture measured by a novel machine learning approach. We apply a difference-in-differences method exploiting the staggered adoption of the Corporate Opportunity Waiver (COW) law across the U.S. states as an exogenous decline in the fiduciary loyalty requirement. We document that the enactment of the COW law weakens corporate culture. Moreover, we show that the COW law adoption leads to a higher degree of outbound board overlapping and busier directors, which serves as a plausible channel through which the COW law adoption erodes corporate culture. Additionally, we find that the negative effect of the COW law adoption on corporate culture is more pronounced among firms with legal expert directors, weaker corporate governance, or attractive outside business opportunities. Our results hold in a rich battery of robustness checks with alternative measures of corporate culture, subsample period, and confounding legislative events. Our findings highlight the importance of fiduciary duty requirement as a disciplinary tool in improving corporate culture, which ultimately enhances firm performance.