While research has shown that good stakeholder relations increase the value of a firm, less is known about how specific types of stakeholder governance affect firm value. We examine the value of one such governance mechanism — community benefits agreements (CBAs) signed by firms and local communities — intended to minimize social conflict that disrupts access to valuable resources.

We argue that shareholders evaluate more positively CBAs with local communities with strong property rights and histories of institutional action and extra-institutional mobilization because these communities are more likely to cause costly disruptions and delays for a firm. We evaluate these arguments by analyzing the cumulative abnormal returns associated with the unexpected announcement of 148 CBAs signed between mining companies and local indigenous communities in Canada.

Our study shows that contractual agreements that govern relationships with stakeholders are not always perceived by investors as adding value to the firm. Instead, their value changes as a function of the strength of stakeholders’ property rights and their history of institutional action and extra-institutional mobilization.

To our knowledge, we provide one of the first empirical studies to demonstrate the financial value of contractual agreements with nonmarket stakeholders outside the value chain of suppliers, firms, and consumers.

By: Sinziana Dorobantu, New York University (NYU) – Leonard N. Stern School of Business, and Kate Odziemkowska, University of Pennsylvania – Management Department

See the full SSRN paper here