Stakeholder orientation and accounting conservatism: Evidence from state-level constituency statutes

• The adoption of state-level constituency statutes leads to a significant decrease in accounting conservatism. • The adoption effect is stronger for firms with greater agency conflicts between shareholders and nonfinancial stakeholders. • The adoption effect is stronger for firms with lower demand for conservatism from shareholders and debtholders. • The adoption of the statutes increases corporate policies that are more friendly to employees, customers, and suppliers. We find that the staggered adoption of state-level constituency statutes leads to a significant decrease in accounting conservatism. Constituency statutes allow directors to consider stakeholder interests when making business decisions, thereby increasing firms’ stakeholder orientation. As firms shift attention to stakeholder interests, stakeholders become less concerned about shareholder expropriation and thus demand less conservatism. Cross-sectional analyses show stronger effects for firms with greater agency conflict between shareholders and nonfinancial stakeholders (i.e., customers, suppliers, and employees) and for firms where shareholders and debtholders have lower demand for conservatism. In additional analyses, we find that the adoption of constituency statutes does allow firms to implement corporate policies that are more friendly to their employees, customers, and suppliers. We also show that the effect of constituency statutes on conservatism still holds when the statutes only cover nonfinancial stakeholders (but not debtholders).