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

Huasheng Gao, Kai Li, Yujing Ma

Research output: Journal article publicationJournal articleAcademic researchpeer-review

16 Citations (Scopus)

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.

Original languageEnglish
Pages (from-to)1908-1944
Number of pages37
JournalJournal of Financial and Quantitative Analysis
Volume56
Issue number6
DOIs
Publication statusPublished - Sep 2021

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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