Stakeholder Orientation and Operations Outcomes: Evidence from Constituency Statutes

32 Pages Posted: 19 Oct 2020 Last revised: 24 May 2021

See all articles by Karca Aral

Karca Aral

Syracuse University - Department of Supply Chain Management

Erasmo Giambona

Syracuse University - Whitman School of Management - Finance Department; James D. Kuhn Center for Real Estate

Luk N. Van Wassenhove

INSEAD

Date Written: May 23, 2021

Abstract

We study the effect of stakeholder orientation on operations decisions. For identification, we exploit a quasi-natural experiment that effectively reduced potential personal costs for executives pursuing stakeholder-oriented decisions, the staggered adoption of constituency statutes. Using a staggered difference-in-difference approach, we find that firms incorporated in constituency states (treated firms) are 15.9 percentage points (pp) more likely to hire a chief operating officer (COO) relative to firms in non-constituency states (control firms) post reform. We also find that treated firms engage more in operational decisions discussions and increase operational investments post reform. Importantly, a structural two-stage least squares approach reveals that these changes in operational decisions, operational investments, and COO hiring contribute to increasing firm value by 17.2%, 12.6%, and 9.3%, respectively. We further find that the chief executive officers of treated firms are less likely to be fired relative to control firms post reform. Altogether, our results suggest that constituency statutes lead to higher firm value by allowing executives to implement stakeholder-oriented operational decisions that were potentially personally too costly for them pre reform. To our best knowledge, our study is the first to identify a clear economic mechanism (i.e., the enlarged decision space for executives following the reform) through which stakeholder orientation, by affecting operations decisions, contributes to firm value. Our work contributes to the sustainable operations literature by identifying the separation between shareholders and managers as a fundamental determinant of responsible operations. Interestingly, while constituency statutes were intended to protect executives adopting stakeholder-oriented policies from shareholders’ sanctions, our findings suggest that these statutes benefited not only executives and non-equity stakeholders, but also shareholders. More broadly, our results indicate that policymakers need to assess the implications of regulatory changes beyond the targeted constituencies. Importantly, shareholders should recognize managerial freedom in operations decisions as an important value driver.

Keywords: Stakeholder orientation, executive decision space, operational decisions, firm value, staggered difference-in-difference, quasi-natural experiments.

JEL Classification: G02, G30, G32, M14, M40.

Suggested Citation

Aral, Karca and Giambona, Erasmo and Van Wassenhove, Luk N., Stakeholder Orientation and Operations Outcomes: Evidence from Constituency Statutes (May 23, 2021). Available at SSRN: https://ssrn.com/abstract=3680127 or http://dx.doi.org/10.2139/ssrn.3680127

Karca Aral (Contact Author)

Syracuse University - Department of Supply Chain Management ( email )

United States

Erasmo Giambona

Syracuse University - Whitman School of Management - Finance Department; James D. Kuhn Center for Real Estate ( email )

721 University Avenue
RM 640
Syracuse, NY 13244-2450
United States
315 443-4885 (Phone)

Luk N. Van Wassenhove

INSEAD ( email )

Boulevard de Constance
77 305 Fontainebleau Cedex
France
(33) (0)1 60 72 42 66 (Phone)
(33) (0)1 60 72 40 49 (Fax)

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