The Relation between Stakeholder Management, Firm Value, and CEO Compensation: A Test of Enlightened Value Maximization

Financial Management, Forthcoming

72 Pages Posted: 8 Aug 2008 Last revised: 23 Oct 2014

See all articles by Bradley W. Benson

Bradley W. Benson

Ball State University - Department of Finance and Insurance

Wallace N. Davidson

Southern Illinois University - Department of Finance

Date Written: November 12, 2009

Abstract

Whether firms pursue shareholder value maximization or the maximization of stakeholder welfare is a controversial issue whose outcomes seem irreconcilable. We propose that firms are likely to compensate their executives for pursuing the firm’s goal, either shareholder value maximization or the maximization of stakeholder welfare. In this paper, we examine the relation between firm value, stakeholder management, and compensation. We find that stakeholder management is positively related to firm value. However, firms do not compensate managers for having good relations with its stakeholders. These results do not support stakeholder theory. We also find an endogenous relation between compensation and firm value. Our results are consistent with Jensen’s enlightened value maximization theory. Managers are compensated for achieving the firm’s ultimate goal, value maximization. However, managers optimize relations with stakeholders to accomplish this objective.

Keywords: Corporate Social Responsibility, Executive Compensation, Firm Value, Stakeholder Theory

JEL Classification: G34, J33, L21, M14, M52

Suggested Citation

Benson, Bradley W. and Davidson, Wallace N., The Relation between Stakeholder Management, Firm Value, and CEO Compensation: A Test of Enlightened Value Maximization (November 12, 2009). Financial Management, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1208403

Bradley W. Benson (Contact Author)

Ball State University - Department of Finance and Insurance ( email )

Muncie, IN 47306-0340
United States
765-285-5299 (Phone)
765-285-4314 (Fax)

Wallace N. Davidson

Southern Illinois University - Department of Finance ( email )

Mail Code 4626
Carbondale, IL 62901-4626
United States
618-453-1429 (Phone)
618-453-5626 (Fax)

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