Stakeholder Orientation, Product Market Competition, and the Cost of Equity

Abstract

We study how shareholders perceive the stronger stakeholder orientation arising from the adoption of constituency statutes by examining their required rates of return. Constituency statutes decrease (increase) the cost of equity for firms operating in high- (low-) competition industries. For firms in high-competition industries, constituency statutes increase future cash flows and performance resilience to negative industry downturns, suggesting that constituency statutes facilitate CSR activities for product differentiation in competitive industries. In contrast, for firms in lowcompetition industries, constituency statutes reduce future cash flows and increase tail risks, suggesting that constituency statutes shield managerial agency problems from discipline.

Keywords: CSR, Stakeholder Orientation, the Cost of Equity, Agency Problems, Product Market Competition, Product Differentiation