For whom (and for when) is the firm governed? The effect of changes in corporate fiduciary duties on tax strategies and earnings management

Abstract

The proper object of the fiduciary duties of corporate directors and officers is frequently described as the central question in all corporate law. We use the adoption of constituency statutes, which shift the loci of corporate managers' duties from shareholders to a wide range of stakeholders, as a quasi-natural experiment to determine the actual impact of fiduciary duties. We find that though the adoption of constituency statutes has no significant effect on measures of earnings management, it has a robust effect on firms' effective tax rate, which increases in a range between 0.570% and 1.903%. These results are robust in terms of various measures of the firm's effective tax rate. We provide explanations for why fiduciary duties apparently do not influence manager behaviours in relation to shareholders but do affect their behaviours in relation to the taxing authority. We argue that a change to fiduciary duties does not appear to alter the motivation of managers to maximize shareholder welfare EUROPEAN FINANCIAL MANAGEMENTWe owe special thanks to the Editor-in-Chief Professor John Doukas and two anonymous reviewers for their very timely and helpful feedback that substantially improved the paper. Also, we owe thanks to Hong Fan, Sofia Johan, and the seminar participants at the

Stakeholder Orientation and Bank Payout Policy: Evidence from US Constituency Statutes

“…Recent evidence for non‐financials (excluding utilities) suggests that the implementation of constituency statutes results in an improvement in financial reporting quality, characterized by a decline in earnings management and information asymmetry (Ni, 2020). However, when using a more comprehensive sample comprising the universe of publicly listed US corporations, Cumming, Tingle and Zhan (2021) document no relationship between constituency statutes and earnings management. From a theoretical perspective, the enactment of constituency statutes further supports the alignment of board member preferences with those of CEOs, which facilitates an improvement in information sharing between managers and directors (Adams and Ferreira, 2007).…”

“…Stakeholderism and corporate governance may have a particular resonance in the banking industry (Cumming et al. , 2021). Banks operate with a more heterogeneous group of stakeholders than non‐financial firms including, but not limited to: depositors, households, small and medium enterprises (SMEs), corporate and sovereign borrowers, employees, regulators, supervisors, shareholders, debtholders, other banks and monetary authorities (Mehran, Morrison and Shapiro, 2011; Hopt, 2013; Berger, Molyneux and Wilson, 2020).…”

“…First, we extend the literature on stakeholderism by adding to the limited evidence base regarding how stakeholder orientation impacts bank behaviour. Prior evidence suggests that stakeholder orientation is an important determinant of non‐financials': firm value (Cremers, Guernsey and Sepe, 2019); innovation (Flammer and Kacperczyk, 2016); cost of debt (Gao, Li and Ma, 2020); stock price crash risk (Li and Zhang, 2020); cash holdings (Chowdhury, Doukas and Park, 2021); earnings management (Radhakrishnan, Wang and Wang, 2018; Ni, 2020); tax planning (Cumming et al , 2021) and payout policy (Ni, Song and Yao, 2020). For the banking industry, Leung, Song and Chen (2019) present evidence that the adoption of stakeholder constituency statutes reduces risk‐taking and improves financial stability.…”

The Beauty of Being Involved: The Case of Cooperative Banks

“…How the fiduciary duty is conceived has a profound impact on the real‐world operations of companies and, not surprisingly, the management literature is rich in papers investigating whether the directors’ fiduciary role is to conduct business in the interests of shareholders or other stakeholders (e.g. Cumming, Tingle and Zhan, 2021; Tingle and Spackman, 2019).…”

“…The management literature has several papers investigating whether directors' fiduciary role is to conduct business in the interests of shareholders or other stakeholders (e.g. Cumming, Tingle and Zhan, 2021; The Beauty of Being Involved 2291 Ding et al, 2022;Tingle and Spackman, 2019). Moreover, some authors (e.g.…”