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

40 Pages Posted: 27 Sep 2017 Last revised: 15 Mar 2022

See all articles by Suresh Radhakrishnan

Suresh Radhakrishnan

JSOM, University of Texas at Dallas

Ke Wang

University of Alberta - School of Business

Zheng Wang

City University of Hong Kong

Date Written: March 14, 2022

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

Suggested Citation

Radhakrishnan, Suresh and Wang, Ke and Wang, Zheng, Stakeholder Orientation and Accounting Conservatism: Evidence from State-Level Constituency Statutes (March 14, 2022). University of Alberta School of Business Research Paper No. 3042901, 2018 Canadian Academic Accounting Association (CAAA) Annual Conference, Available at SSRN: https://ssrn.com/abstract=3042901 or http://dx.doi.org/10.2139/ssrn.3042901

Suresh Radhakrishnan (Contact Author)

JSOM, University of Texas at Dallas ( email )

Mail Stop SM 41
800 West Campbell Road
Richardson, TX 75080
United States
972-883-4438 (Phone)
972-883-6811 (Fax)

Ke Wang

University of Alberta - School of Business ( email )

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Edmonton, Alberta T6G 2R6
Canada
+1 780-492-1630 (Phone)

Zheng Wang

City University of Hong Kong ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong
China

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