Stakeholder Orientation and Accounting Conservatism: Evidence from State-Level Constituency Statutes

Abstract

We examine the effect of the staggered adoption of state-level constituency statutes on stakeholder demand for accounting conservatism. Constituency statutes allow directors to consider stakeholder interests when making business decisions, thereby increasing a firm’s stakeholder orientation. We predict that as firms shift attention to stakeholder interests, stakeholders become less concerned about shareholder expropriation and thus demand less conservatism. Using a difference-in-differences analysis, we find support for the hypothesis. Cross-sectional analyses show stronger effects for firms with greater agency conflict between shareholders and nonfinancial stakeholders (i.e., customers, suppliers, and employees) and for firms where shareholders and debtholders have lower demand for conservatism. Further, we find the reduction in risk taking and the appointment of stakeholder-oriented directors as two potential channels through which the adoption of constituency statutes decreases stakeholders’ demand for conservatism. We also show that the effect of the constituency statutes on conservatism holds for the statutes that only cover nonfinancial stakeholders (but not debtholders).

Keywords: stakeholder orientation, accounting conservatism, constituency statutes, customers, suppliers, employees

JEL Classification: M14, M41