The Impact of Stakeholder Orientation on Innovation: Evidence from a Natural Experiment

In this study, we assess the causal impact of stakeholder orientation on innovation. To obtain exogenous variation in stakeholder orientation, we exploit the enactment of state-level constituency statutes, which allow directors to consider stakeholders’ interests when making business decisions. Using a difference-indifferences methodology, we find that the enactment of constituency statutes leads to a significant increase in the number of patents and citations per patent. We further assess the mechanisms through which stakeholder orientation fosters innovation. In particular, we argue that stakeholder orientation sparks innovation by promoting a secure work environment and enhancing the satisfaction of various stakeholders, including employees and customers. Consistent with this argument, we find that the positive impact of stakeholder orientation on innovation is greater in industries with lower job security as well as industries and firms with lower stakeholder satisfaction.