Does Bank Stakeholder Orientation Enhance Financial Stability?

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