Stakeholder Orientation and Accounting Conservatism: Evidence from State-Level Constituency Statutes
Key takeaways Adopting state-level constituency statutes is related to a significant decrease in accounting conservatism, especially for firms with greater agency conflicts between shareholders (represented by directors and managers) and nonfinancial stakeholders such as employees, customers, and suppliers. The state-level constituency statutes allow directors and managers to adopt direct mechanisms to protect stakeholder interests in […]
Posted by Suresh Radhakrishnan (The University of Texas at Dallas), Ke Wang (University of Alberta), and Zheng Wang (City University of Hong Kong), on Thursday, April 17, 2025
Editor's Note:
Suresh Radhakrishnan is a Professor of Accounting at The University of Texas at Dallas, Ke Wang is an Associate Professor of Accounting at University of Alberta, and Zheng Wang is a Professor of Accounting at City University of Hong Kong. This post is based on their recent article forthcoming in the Journal of Accounting and Public Policy.
Key takeaways
- Adopting state-level constituency statutes is related to a significant decrease in accounting conservatism, especially for firms with greater agency conflicts between shareholders (represented by directors and managers) and nonfinancial stakeholders such as employees, customers, and suppliers.
- The state-level constituency statutes allow directors and managers to adopt direct mechanisms to protect stakeholder interests in business decisions without breaching the fiduciary duty owed to shareholders. The direct protection mechanisms reduce nonfinancial stakeholders’ demand for the indirect protection mechanism of accounting conservatism. The evidence in this study is consistent with the view that nonfinancial stakeholders demand conservative accounting policy as protection for their relationship-specific investments.
- The findings suggest that stakeholder-oriented legislative changes effectively increase corporate attention to stakeholder interests.
