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Stakeholder Orientation and the Cost of Debt: Evidence from State-Level Adoption of Constituency Statutes

Published online by Cambridge University Press:  27 August 2020

Huasheng Gao Open the ORCID record for Huasheng Gao [Opens in a new window] ,
Kai Li Open the ORCID record for Kai Li [Opens in a new window]  and
Yujing Ma Open the ORCID record for Yujing Ma [Opens in a new window]
Huasheng Gao
Affiliation:
Fudan University Fanhai International School of Financehuashenggao@fudan.edu.cn
Kai Li*
Affiliation:
University of British Columbia Sauder School of Business
Yujing Ma
Affiliation:
Hong Kong Polytechnic University School of Accounting and Financeyujingma@connect.polyu.hk
*
kai.li@sauder.ubc.ca (corresponding author)
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Abstract

We examine the causal effect of stakeholder orientation on firms’ cost of debt. Our test exploits the staggered state-level adoption of constituency statutes, which allows directors to consider stakeholders’ interests when making business decisions. We find a significant drop in loan spreads for firms incorporated in states that adopted such statutes relative to firms incorporated elsewhere. We further show that constituency statutes reduce the cost of debt through the channels of mitigating conflicts of interest between residual and fixed claimants and between holders of liquid claims and holders of illiquid claims, limiting legal liability and lowering takeover threats.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 56 , Issue 6 , September 2021 , pp. 1908 - 1944
Copyright
© The Author(s), 2020. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

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Footnotes

We are grateful for helpful comments from Rajesh Aggarwal, Rui Albuquerque, Aziz Alimov, Andrea Buffa, Utpal Bhattacharya, Murray Carlson, Ling Cen, Sandra Chamberlain, Chun Chang, Shaq Chi, Wan-Chien Chiu, François Derrien, Bernard Dumas, Lorenzo Garlappi, Edith Ginglinger, Sergei Glebkin, Will Gornall, Mark Grinblatt, Jarrad Harford, Mark Huson, Chuanyang Hwang, Yeejin Jang, Jon Karpoff, Youngsoo Kim, Karthik Krishnan, Ali Lazrak, Angie Low, Xiaoxia Lou, Guangli Lu, Evgeny Lyandres, Peter Mackay, Paul Malatesta (the editor), Massimo Massa, Egor Matveyev, Vikas Mehrotra, Randall Morck, Kasper Nielsen, Hernan Ortiz-Molina, Clemens Otto, Dino Palazzo, Joël Peress, Edward Podolski, Jeff Pontiff, Lynnette Purda, Sahil Raina, David Reeb, Jon Reuter, Lukas Roth, Zacharias Sautner, Katherine Schipper, Elena Simintzi, Phil Strahan, Günter Strobl, Sheridan Titman, Chishen Wei, John Wei, Lucy White, Michael Wittry (the referee), Hong Yan, Alminas Zaldokas, and Kuncheng Zheng; seminar participants at Boston College, Boston University, the Frankfurt School of Finance and Management, HEC Paris, Hong Kong University of Science and Technology (HKUST), Hong Kong Polytechnic University, INSEAD, Nanyang Technological University, National University of Singapore, Northeastern University, Paris Dauphine University, Shanghai Advanced Institute of Finance, the University of Alberta, and the University of British Columbia; and conference participants at the 2017 Financial Management Association (FMA) Asia/Pacific Conference, the 2017 China International Conference in Finance, and the 2017 Northern Finance Association conference. Gao acknowledges financial support from Shanghai Pujiang Program (Reference Number: 18PJC007), the Program for Professor of Special Appointment (Eastern Scholar) at Shanghai Institutions of Higher Learning (Reference Number: TP2018001), and the National Natural Science Foundation of China (Reference Number: 71973029). Li acknowledges financial support from the Social Sciences and Humanities Research Council of Canada (SSHRC; Grant Number: 435-2013-0023). All errors are our own.

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