Does Bank Stakeholder Orientation Enhance Financial Stability?

57 Pages Posted: 2 Oct 2015 Last revised: 14 Jan 2019

See all articles by Woon Sau Leung

Woon Sau Leung

The University of Edinburgh Business School, The University of Edinburgh

Wei Song

Swansea University - School of Management

Jie Chen

Leeds University Business School, University of Leeds

Date Written: January 12, 2019

Abstract

Using the staggered enactment of constituency statutes across US states, we find that banks with directors whose legal duties are expanded to consider stakeholder and long-term interests significantly reduce risk-taking by increasing capital and shifting to safer borrowers. Additionally, we find that the effect of statute enactment on bank performance is insignificant on average but significantly positive for banks that take excessive risk. Furthermore, we find that banks that previously received a statute enactment fared significantly better during the crises. Our findings support the increasing calls for greater emphasis on stakeholder interests amidst the current bank regulatory and governance reforms.

Keywords: Bank risk-taking; Stakeholder orientation; Constituency statutes; Fiduciary duties; Financial stability.

JEL Classification: G01, G21, G28, G32, M14

Suggested Citation

Leung, Woon Sau and Song, Wei and Chen, Jie, Does Bank Stakeholder Orientation Enhance Financial Stability? (January 12, 2019). Journal of Corporate Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2668126 or http://dx.doi.org/10.2139/ssrn.2668126

Woon Sau Leung (Contact Author)

The University of Edinburgh Business School, The University of Edinburgh ( email )

29 Buccleuch Pl
Edinburgh, Scotland EH8 9JS
United Kingdom

Wei Song

Swansea University - School of Management ( email )

Singleton Park
Swansea, Wales SA2 8PP
United Kingdom

Jie Chen

Leeds University Business School, University of Leeds ( email )

Leeds LS2 9JT
United Kingdom

HOME PAGE: http://https://business.leeds.ac.uk/about-us/our-people/staff-directory/profile/jie-chen-1/

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