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Stock market response to the statement on the purpose of a corporation: A vindication of stakeholder theory

Stock market response to the statement on the purpose of a corporation: A vindication of stakeholder theory
Stock market response to the statement on the purpose of a corporation: A vindication of stakeholder theory

Research question/issue: on August 19, 2019, the Business Roundtable (2019) released a statement signed by 181 chief executive officers (CEOs) of well-known US corporations, in which they pledged “a fundamental commitment” to “deliver value to all” stakeholders. This study examines the stock market reaction to this new statement on the purpose of a corporation. 

Research findings/insights: based on a sample of 163 publicly listed companies that signed the pledge, the results show that investors react positively to a firm's pledge in the days surrounding the statement release. The consensus among stock market investors was robust, characterized by the low volatility in the share price post-announcement date. The decision by these companies, though intended to maximize the wealth of all stakeholders, rather than shareholders alone, carries an opportunity cost. Specifically, a post-announcement decline in share buybacks by pledge firms relative to control firms is observed, though investors embracing stakeholder theory appear undeterred by the reduction in distributions. 

Theoretical/academic implications: this study provides empirical support that, in the evolving business environment, companies must emphasize issues that concern customers, employees, non-governmental organizations (NGOs), and the government. Failure to prioritize these issues may engender public backlash, especially in the age of social media. However, the attention to stakeholders is compatible with the focus on shareholder performance. Performance suffers when customers leave, workers feel dissatisfied, NGOs call for boycotts, and governments levy fines. Corporations seeking to increase shareholder wealth will need to fully embrace stakeholder concerns. 

Practitioner/policy implications: this study shows that adopting a stakeholder perspective unlocked value that would not have been achieved had the focus remained on shareholder primacy. The excess values may derive from greater customer loyalty, improved employee motivation, better supplier relations, supportive financiers, maximizing revenue, minimizing costs, and/or yielding higher profits. Shareholders anticipate greater long-term value from companies emphasizing employees, communities, supply chain, financiers, and shareholders.

business roundtable, corporate governance, event study, purpose of a corporation, shareholder primacy, stakeholder theory
0964-8410
892-920
Glambosky, Mina
640a0679-51db-45ed-9f48-befbc67ae01d
Jory, Surendranath Rakesh
2624eb24-850a-48f6-b3c6-c96749b87322
Ngo, Thanh
852ea7b9-fd74-4a39-9281-87626e50886b
Glambosky, Mina
640a0679-51db-45ed-9f48-befbc67ae01d
Jory, Surendranath Rakesh
2624eb24-850a-48f6-b3c6-c96749b87322
Ngo, Thanh
852ea7b9-fd74-4a39-9281-87626e50886b

Glambosky, Mina, Jory, Surendranath Rakesh and Ngo, Thanh (2023) Stock market response to the statement on the purpose of a corporation: A vindication of stakeholder theory. Corporate Governance: An International Review, 31 (6), 892-920. (doi:10.1111/corg.12508).

Record type: Article

Abstract

Research question/issue: on August 19, 2019, the Business Roundtable (2019) released a statement signed by 181 chief executive officers (CEOs) of well-known US corporations, in which they pledged “a fundamental commitment” to “deliver value to all” stakeholders. This study examines the stock market reaction to this new statement on the purpose of a corporation. 

Research findings/insights: based on a sample of 163 publicly listed companies that signed the pledge, the results show that investors react positively to a firm's pledge in the days surrounding the statement release. The consensus among stock market investors was robust, characterized by the low volatility in the share price post-announcement date. The decision by these companies, though intended to maximize the wealth of all stakeholders, rather than shareholders alone, carries an opportunity cost. Specifically, a post-announcement decline in share buybacks by pledge firms relative to control firms is observed, though investors embracing stakeholder theory appear undeterred by the reduction in distributions. 

Theoretical/academic implications: this study provides empirical support that, in the evolving business environment, companies must emphasize issues that concern customers, employees, non-governmental organizations (NGOs), and the government. Failure to prioritize these issues may engender public backlash, especially in the age of social media. However, the attention to stakeholders is compatible with the focus on shareholder performance. Performance suffers when customers leave, workers feel dissatisfied, NGOs call for boycotts, and governments levy fines. Corporations seeking to increase shareholder wealth will need to fully embrace stakeholder concerns. 

Practitioner/policy implications: this study shows that adopting a stakeholder perspective unlocked value that would not have been achieved had the focus remained on shareholder primacy. The excess values may derive from greater customer loyalty, improved employee motivation, better supplier relations, supportive financiers, maximizing revenue, minimizing costs, and/or yielding higher profits. Shareholders anticipate greater long-term value from companies emphasizing employees, communities, supply chain, financiers, and shareholders.

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Corporate Governance - 2023 - Glambosky - Stock market response to the statement on the purpose of a corporation A - Version of Record
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More information

Accepted/In Press date: 30 November 2022
e-pub ahead of print date: 2 February 2023
Published date: November 2023
Additional Information: Publisher Copyright: © 2023 The Authors. Corporate Governance: An International Review published by John Wiley & Sons Ltd.
Keywords: business roundtable, corporate governance, event study, purpose of a corporation, shareholder primacy, stakeholder theory

Identifiers

Local EPrints ID: 475546
URI: http://eprints.soton.ac.uk/id/eprint/475546
ISSN: 0964-8410
PURE UUID: 651e5d41-6b78-4d40-bc57-a029bbb523d1
ORCID for Surendranath Rakesh Jory: ORCID iD orcid.org/0000-0002-8265-0001

Catalogue record

Date deposited: 21 Mar 2023 17:41
Last modified: 06 Jun 2024 01:51

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Contributors

Author: Mina Glambosky
Author: Thanh Ngo

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