Jiao, Yawen. "Stakeholder Welfare and Firm Value", Working Paper, Rensselaer Polytechnic Institute, March 2009.

This study measures the impact of stakeholder management on firm valuation. It finds that firms with good stakeholder management skills tend to earn premium valuations.

The author examines 822 U.S. companies for the 1992 to 2003 time period. Valuation is estimated using Tobin's Q (defined here as Mkt value of equity + book value of assets - book value of equity - balance sheet deferred taxes, all divided by the book value of assets) as the dependent variable.

The independent variables are a variety of stakeholder-related constructs based on KLD social factors: Community, Diversity, Environment, Employee, and Product.

Many additional variables are used to control for factors known to influence Tobin's Q, including ROA, Capex/Assets, R&D/Sales, and G (the corporate governance variable developed by Gompers et al). Significant efforts are also made to control endogeneity problems, e.g., the issue of reverse causality (which comes first - happy employees or high stock price?). Financial data are drawn from Compustat, while stock price and firm age are sourced from the CRSP database.

The regression analysis shows that companies with higher stakeholder relations scores earn higher valuations ("an increase of 1 in the stakeholder welfare score leads to an increase of 0.587 in Tobin's Q"), and that this is driven primarily by companies with superior performance in the environmental and employee relations areas.

As a check, a similar set of regressions is conducted using net profit margin (excluding extraordinary items) as the dependent variable, resulting in similar findings.

Concludes that "these results suggest that stakeholder welfare (in particular, employee welfare and environmental performance) represent intangibles (such as reputation or human capital) crucial for shareholder value creation rather than private benefits managers pursue for their own social or economic needs."