The Relation between Stakeholder Management, Firm Value, and CEO Compensation: A Test of Enlightened Value Maximization
Bradley W. Benson
Ball State University - Department of Finance and Insurance
Wallace N. Davidson III
Southern Illinois University at Carbondale - Department of Finance
November 12, 2009
Financial Management, Forthcoming
Whether firms pursue shareholder value maximization or the maximization of stakeholder welfare is a controversial issue whose outcomes seem irreconcilable. We propose that firms are likely to compensate their executives for pursuing the firm’s goal, either shareholder value maximization or the maximization of stakeholder welfare. In this paper, we examine the relation between firm value, stakeholder management, and compensation. We find that stakeholder management is positively related to firm value. However, firms do not compensate managers for having good relations with its stakeholders. These results do not support stakeholder theory. We also find an endogenous relation between compensation and firm value. Our results are consistent with Jensen’s enlightened value maximization theory. Managers are compensated for achieving the firm’s ultimate goal, value maximization. However, managers optimize relations with stakeholders to accomplish this objective.
Number of Pages in PDF File: 72
Keywords: Corporate Social Responsibility, Executive Compensation, Firm Value, Stakeholder Theory
JEL Classification: G34, J33, L21, M14, M52Accepted Paper Series
Date posted: August 8, 2008 ; Last revised: November 19, 2009
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