Stakeholder Orientation and Firm Value

Abstract

We analyze the relation between enhanced director discretion to consider stakeholder interests (“stakeholder orientation”) and firm value by exploiting the adoption of directors’ duties laws (DDLs) as a quasi-natural experiment. We find that DDLs result in significant increases in shareholder value, especially in more innovative firms and those with stronger stakeholder relationships. DDLs also improve employees’ job security, financial soundness and innovation. These benefits, however, are offset in firms with more severe agency problems. Our results suggest that stakeholder orientation improves the commitment toward stakeholders and reduces contracting costs in many firms, but one size does not fit all.

Keywords: Stakeholder orientation, antitakeover statutes, firm value, bonding

JEL Classification: G32, G34, K22, O32