Can Firms Do Well for Shareholders by Doing Good for Stakeholders? The Importance of Long-Term Investors
63 Pages Posted: 4 Jan 2013 Last revised: 10 Jun 2013
Date Written: December 9, 2012
The effect of corporate investment in stakeholder capital on shareholder value is a matter of great debate. We argue that long-term investors are natural monitors that can ensure that managers choose stakeholder capital investment to maximize shareholder value. We find that firms with longer investor horizons invest more in stakeholder capital, and such firms have higher stock valuations, which are not a result of higher cash flow but rather of lower cash flow risk. To establish causality, we use long-term investor that are indexers and long-term investors in index firms. Our results suggest that firms can do well for shareholders by doing good for other stakeholders as long as they are properly monitored by long-term investors.
Keywords: Agency problems, Corporate governance, Monitoring, Managerial myopia, Institutional investors, Investor horizons, Investment, Corporate social responsibility, Intangibles, Shareholders, Stakeholders
JEL Classification: G12, G23, G31, G32, G34, L21, M14
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