The Impact of Stakeholder Orientation on Bank Risk-Taking: Evidence from Natural Experiment

Abstract

Using the staggered enactment of US state constituency statutes, which expand directors’ authority to consider stakeholder and long-term interests, we find that stakeholder orientation significantly reduces bank risk. This relationship is robust to reverse causality and controlling for coincidental banking policy changes and unobservable local economic conditions. Consistent with lower risk-taking, we find that after statute enactment, banks increase their capital and lend to safer borrowers. Furthermore, we show that the effect of stakeholder orientation on bank performance is insignificant on average but significantly positive for banks that likely take excessive risk. Finally, we find that banks that previously received a statute enactment fared significantly better during the crises. Overall, our findings support the increasing calls for greater emphasis on stakeholder interests in the current bank regulatory and governance reforms.