Stakeholder Governance, Competition, and Firm Value*

Abstract

We analyze the strengths and weaknesses of stakeholder and shareholder firms in a model of imperfect competition. Stakeholder firms are more concerned with avoiding bankruptcy to protect their employees and suppliers. In equilibrium, they are more valuable than shareholder firms when marginal cost uncertainty exceeds demand uncertainty. With globalization shareholder firms and stakeholder firms often compete. We identify the circumstances where stakeholder firms are more valuable than shareholder firms and compare these mixed equilibria with the pure equilibria with stakeholder and shareholder firms only. Finally, we analyze firm financial constraints and derive implications for the capital structure of stakeholder firms.