Managing Corporate Distress: The Surplus Assumption of Stakeholder Value-Based Strategy

Abstract

In this study, I examine the surplus assumption embedded within current studies on stakeholder value-based strategy and whether a corporation’s stakeholder management can precipitate or negate corporate distress. By defining corporate distress as a condition of challenged legitimacy arising from the failure to satisfy the minimum appropriation demands of powerful stakeholders, I create a perspective for managing corporate distress that is complementary to existing studies on organizational decline, corporate failure, and financial distress, yet extends their findings to better capture why corporations with similar financial and economic characteristics may have differing probabilities of experiencing corporate distress. Specifically, using panel regression, difference-in-difference, and machine learning statistical methods on a sample of 8,256 publicly traded corporations, I find cultivating ex ante relational capital with a corporation’s more powerful stakeholders, as measured by stakeholder sentiment across 26 distinct environmental, social, and governance (ESG) issues, is associated with a lower probability of entering corporate distress, particularly when environmental uncertainty is high.