Stakeholder Value: A Convenient Excuse for Underperforming Managers?

Ryan Flugum · Matthew E. Souther

35 citations0/0 files storedJournal of Financial and Quantitative Analysis

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Corporate Social Responsibility Reporting Corporate Finance and Governance Auditing, Earnings Management, Governance

Abstract

Abstract Firms falling short of earnings expectations are more likely to cite stakeholder-focused objectives in their public communications following earnings announcements. This behavior is consistent with managers preferring to be evaluated by subjective stakeholder-based performance criteria when falling short on objective shareholder-based measures. This increased use of stakeholder language is most evident among firms narrowly missing earnings estimates and appears unrelated to a firm’s actual environmental, social, and governance (ESG)-related activity. Stakeholder language appears to influence the evaluation of CEOs; turnover–performance sensitivity is lower for managers citing stakeholder value. Collectively, our findings are consistent with concerns that stakeholder objectives reduce managerial accountability for poor performance.

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References

1976Theory of the firm: Managerial behavior, agency costs and ownership structure 1991Earnings Management During Import Relief Investigations 1995Detecting Earnings Management.1968An Empirical Evaluation of Accounting Income Numbers 2005The economic implications of corporate financial reporting 2003Earnings Management through Real Activities Manipulation 1999A Review of the Earnings Management Literature and Its Implications for Standard Setting 2010Voluntary Nonfinancial Disclosure and the Cost of Equity Capital: The Initiation of Corporate Social Responsibility Reporting

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