Obey the Law and Do a Little Bit Extra?
36 Pages Posted: 19 Sep 2008 Last revised: 30 Nov 2009
Date Written: August 24, 2008
The paper provides evidence on how stakeholder friendly and stakeholder hostile corporations are associated with standard measures of corporate governance using the panel of 1778 US companies during the period of 1995-2006. We construct two binary indicators, one measuring stakeholder hostility and the other stakeholder friendliness using KLD social responsibility ratings in local and global community, employee, customer and environment areas. Based on these indicators, we classify firms into four groups representing stakeholder hostile, neutral, friendly and "friendly & hostile" firms. The results from the descriptive analysis show that stakeholder friendly and stakeholder hostile firms tend to have significantly lower insider ownership, smaller option grants, lower pay-performance sensitivities, larger boards, older executive officers and directors, lower institutional ownership and larger number of anti-takeover defenses than the firms in the neutral group. The regression analysis shows that the probability of a firm belonging to stakeholder friendly or "friendly & hostile" group is decreasing in pay-performance sensitivity and increasing in the number of anti-takeover defenses controlling for size, industry and other firm characteristics. We also find that the probability of stakeholder hostile activity is positively related to the strength of corporate governance, but the effect is insignificant except in local and global community areas. A possible explanation is that in these areas stakeholders are protected mainly by ethics and social norms rather than by various regulations that is commonplace in labour, environment and customer related areas. The latter lends support for the idea that stakeholders are best protected by various regulations.
Keywords: Corporate Governance, Stakeholders, Regulation
JEL Classification: G32, G34
Suggested Citation: Suggested Citation