Banks and Labor as Stakeholders : Impact on Economic Performance

The stakeholder view of corporate governance, especially when based on incomplete-contracts theory, suggests that stakeholders' relative bargaining powers affect overall firm performance. We investigate this utilizing a natural experiment in the U.S. Specifically, we study the impact of bank branch deregulations and increases in employment protection, which were introduced at different times on a state-by-state basis between 1972 and 1993. We find that financial deregulation impacts overall state growth positively but stronger employment protection affects it ambiguously. At the state-industry level, greater employment protection hinders the growth of low-skill industries but promotes the growth of knowledge-intensive industries. We further find that this effect stems from stronger relative bargaining powers of workers, in addition to the effects of higher absolute employment protection. We conclude that stakeholders' corporate governance is especially relevant for knowledge-intensive industries