The Impact of the Agency Environment on Management’s Long-Term Focus

The 1991 Credit Lyonnais court ruling expanded the fiduciary duties of managers towards debtholders in near-insolvent Delaware firms. Differences-in-differences tests reveal that innovation efficiency increased among all Delaware firms following the ruling. Further, Delaware firms close to (far from) insolvency reduced (expanded) their R&D expenditures and innovation output. Both sets of firms exhibit a reduced focus on meeting myopic earnings goals, and a shift from transient towards dedicated institutional owners. We conclude that expanding fiduciary duties towards debtholders motivated a longer-term focus at Delaware firms and, as evidenced by improvements in Tobin’s Q and solvency, benefited both shareholders and debtholders. JEL codes: D92, G3, G32, G33, G23, K20, K22, M40, M41, O3, O32 * We thank Mark Bradshaw, Amy Hutton, Susan Shu, Thor Sletten, Jerry Zimmerman and seminar participants at Baruch College, MIT, Singapore Management University, the University of Iowa, the University of Miami, and the HKUST Conference for valuable comments and suggestions.