ABSTRACT

A firm has numerous non-investor stakeholders, such as customers, employees, and potential business partners, who provide needed monetary and nonmonetary support to the firm. In Essay One, I provide empirical evidence on the previously untested theoretical prediction that these stakeholders’ views of a firm depend on its ability to meet relevant earnings benchmarks. Using published and proprietary reputation scores to capture stakeholder perceptions, I find in both levels and changes analyses that non-investor stakeholder perceptions are positively associated with a firm’s ability to beat relevant earnings benchmarks and that the relevant earnings benchmark for each stakeholder group varies based on the nature of its claim. Specifically, customer perceptions are positively associated with a firm’s ability to meet the profit benchmark. Potential business partner perceptions are positively associated with a firm’s ability to meet both the analyst forecast benchmark and the earnings growth benchmark. Employee perceptions are positively associated with a firm’s ability to meet the earnings growth benchmark. These findings highlight broader uses of and broader audiences for accounting information than previously documented.

In Essay Two, I examine whether and how firms consider their non-investor stakeholders when prioritizing which earnings benchmarks to meet or beat. Using a sample of publicly traded firms from 1990 to 2015, I identify which non-investor stakeholder group (i.e. consumers, employees, or potential business partners) is most critical to a firm based on a stakeholder dependency score, which measures the extent to which a firm relies on a particular stakeholder group. I find that, regardless of which non-investor stakeholder group is most critical to the firm, firms beat the analyst forecast benchmark several times more frequently than they beat other benchmarks. Because the analyst forecast is the most important benchmark to the capital market, this finding indicates that managers place greater weight on investors’ preferences than on the preferences of their non-investor stakeholders when deciding which earnings benchmarks to meet or beat. Thus, capital market pressure appears to dominate the pressure from non-investor stakeholders. However, I also find that consumer-focused (employee-focused) firms meet or beat the profit benchmark (the increase benchmark) more often than non-consumer-focused firms (non-employee-focused firms) when the profit benchmark (the increase benchmark) is the most difficult to beat or when pre-managed earnings falls short of the associated benchmark. These results indicate that firms are more likely to meet or beat the specific earnings benchmark that is most relevant to a particular non-investor stakeholder group when that non-investor stakeholder group is most critical to the firm. These findings contribute to a better understanding of how managers incorporate non-investor stakeholders’ preferences in their decisions about which earnings benchmarks to meet or beat.