Stakeholder Orientation and the Cost of Debt: Evidence from State-level Adoption of Constituency Statutes

Abstract

We examine the causal effect of stakeholder orientation on firms’ cost of debt. Our test exploits the staggered state-level adoption of constituency statutes, which allows directors to consider stakeholders’ interests when making business decisions. We find a significant drop in loan spreads for firms incorporated in states that adopted such statutes relative to firms incorporated elsewhere. We further show that constituency statutes reduce the cost of debt through the channels of mitigating conflicts of interest between residual and fixed claimants and between holders of liquid claims and holders of illiquid claims, limiting legal liability, and lowering takeover threats.

Keywords: stakeholder orientation; constituency statutes; bank loans; cost of debt; corporate social responsibility; debt overhang; legal risk; takeover deterrence

JEL Classification: G21; G30; M14