Abstract
The effect of corporate investment in stakeholder capital on shareholder value is a matter of great debate. We argue that long-term investors are natural monitors that can ensure that managers choose stakeholder capital investment to maximize shareholder value. We find that firms with longer investor horizons invest more in stakeholder capital, and such firms have higher stock valuations, which are not a result of higher cash flow but rather of lower cash flow risk. Several recent papers show empirically that indexing by investors has a causal effect on many corporate outcomes: profitability; investment, financing, and payout policies; and even innovation. We use the same identification strategy to establish causality of our results. Our findings suggest that firms can do well for shareholders by doing good for other stakeholders as long as managers are properly monitored by long-term investors.
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