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

59 Pages Posted: 3 Dec 2016 Last revised: 14 May 2020

See all articles by Huasheng Gao

Huasheng Gao

Fanhai International School of Finance, Fudan University

Kai Li

University of British Columbia (UBC) - Sauder School of Business; Asian Bureau of Finance and Economic Research (ABFER); China Academy of Financial Research (CAFR); European Corporate Governance Institute (ECGI); Canadian Sustainable Finance Network (CSFN)

Yujing Ma

Hong Kong Polytechnic University

Date Written: May 12, 2020

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

Suggested Citation

Gao, Huasheng and Li, Kai and Ma, Yujing, Stakeholder Orientation and the Cost of Debt: Evidence from State-level Adoption of Constituency Statutes (May 12, 2020). Available at SSRN: https://ssrn.com/abstract=2878415 or http://dx.doi.org/10.2139/ssrn.2878415

Huasheng Gao (Contact Author)

Fanhai International School of Finance, Fudan University ( email )

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Kai Li

University of British Columbia (UBC) - Sauder School of Business ( email )

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China Academy of Financial Research (CAFR)

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European Corporate Governance Institute (ECGI) ( email )

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Canadian Sustainable Finance Network (CSFN) ( email )

Queens University
Kingston, ON
Canada

HOME PAGE: http://https://smith.queensu.ca/centres/isf/research/network.php

Yujing Ma

Hong Kong Polytechnic University ( email )

Hung Hom
Kowloon
Hong Kong

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