On stakeholder theory and corporate investment under financial frictions

Abstract

The view that corporations have a wider focus than just maximizing shareholder value has received considerable attention from practitioners, managers, and academics alike. We investigate the Q theory of corporate investment with financial frictions when management maximizes stakeholder value instead of shareholder value. Different objective functions are investigated. We characterize the optimal investment and financial policy of the firm. The results show that stakeholder firms invest more than shareholder firms, i.e., over-investing, and an increase of stakeholder shares increases investment, except when equity issuing firms face severe informational asymmetries or severe cost of external equity. We also discuss different approaches to model investment of stakeholder firms and their implications for empirical analysis.