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Stakeholder orientation and managerial incentives: Evidence from a natural experiment

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  • Romec, Arthur

Abstract

This paper examines the influence of stakeholder orientation on the design of managerial incentives. Our tests exploit the quasi-natural experiment provided by the staggered adoption of directors' duties laws (i.e., state-level laws that explicitly expand board members' duties to act in the best interests of all stakeholders). We find that the enactment of these laws results in a significant decrease in the sensitivity of CEO wealth to the stock price. This decrease is mostly driven by firms most exposed to pressures to maximize short-term stock price. Our results suggest that the decrease in the sensitivity of CEO compensation to the stock price is an important channel boards use to internalize stakeholder orientation.

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  • Romec, Arthur, 2023. "Stakeholder orientation and managerial incentives: Evidence from a natural experiment," International Review of Financial Analysis, Elsevier, vol. 88(C).
    • Handle: RePEc:eee:finana:v:88:y:2023:i:c:s105752192300193x
    DOI: 10.1016/j.irfa.2023.102677
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    More about this item

    Keywords

    Stakeholder orientation; Executive compensation; Managerial incentives; directors' duties laws; Corporate social responsibility;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • M14 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Corporate Culture; Diversity; Social Responsibility

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