Staggered adoption of stakeholder constituency statutes and corporate cash holdings in the U.S.

Fiduciary duties of managers are often referred to as the “primacy question” in corporate law. However, extant literature focuses on the primacy of shareholders' interests. We examine the effect of adopting constituency statutes (CS) on corporate cash holdings (CCH) in the U.S. that shift the focus of shareholder primacy to stakeholders. Utilizing a large sample of 71,461 firm-year observations relating to 35 states covering the 1982–2010 period and the difference-in-differences method, we observe a positive and significant link between CS adoption and CCH. We identify cash flows from financing activities as the major source of growth in CCH. Finally, channel analysis shows that the link is stronger for firms exposed to economic policy uncertainty, states with high individualism and social capital, and weak corporate governance. Our findings demonstrate that emphasis should be placed on stakeholder interest for society's greater good and long-term corporate sustainability.