Stakeholder Capitalism, Corporate Governance and Firm Value∗

We consider the advantages and disadvantages of stakeholder-oriented firms that are concerned with employees and suppliers as well as shareholders compared to shareholderoriented firms. Societies with stakeholder-oriented firms have higher prices, lower output, and can have greater firm value than shareholder-oriented societies. In some circumstances, firms may voluntarily choose to be stakeholder-oriented because this increases their value. Consumers that prefer to buy from stakeholder firms can also enforce a stakeholder society. With globalization entry by stakeholder firms is relatively more attractive than entry by shareholder firms for all societies. ∗We are grateful to Giancarlo Spagnolo, Merih Sevilir, and Raghu Sundaram for their very helpful comments and suggestions and to seminar participants at HEC, the University of Frankfurt, Gothenberg, Mannheim, the Max Planck Institute in Bonn, and to participants at the UNC-Duke 2006 Corporate Finance Conference, the 2006 Summer Research Conference at the Indian School of Business, and the 2007 NBER/RFS Workshop. Franklin Allen is grateful to the Wharton Financial Institutions Center for financial support. Contact author: Franklin Allen, Wharton, School, University of Pennsylvania, 3620 Locust Walk, Philadelphia, PA 19104-6367, e-mail: [email protected]. Stakeholder Capitalism, Corporate Governance and Firm Value