Stakeholder Orientation and Accounting Conservatism : Evidence from a Natural Experiment

We examine the effect of the staggered adoption of state-level constituency statutes on stakeholder demand for accounting conservatism. Constituency statutes allow directors to consider stakeholder interests when making business decisions, thereby exogenously increasing a firm's stakeholder orientation. Using a difference-in-differences analysis, we find that the increase in stakeholder orientation leads to a decrease in accounting conservatism. In other words, as firms shift attention to stakeholder interests, stakeholders become less concerned about shareholder expropriation and thus demand less conservatism. Cross-sectional analyses show stronger effects when there are potentially larger decreases in the demand for conservatism from customers, suppliers, and employees, and when equityholders and debtholders tend to have lower demand for conservatism. Further, we find the reduction in risk taking and the appointment of stakeholder-oriented directors as two potential channels through which the adoption of constituency statutes decreases stakeholders' demand for conservatism