Response to the Risk of Service Liability: the Case of Medical Malpractice Liability

Na-Eun Cho (Hongik University)
Yue M. Zhou (University of Michigan)

Abstract : We compare responses from private for-profit organizations and private not-for-profit organizations to the changing risk of service liability using hospital medical expenditures, state medical malpractice awards, and state tort reform data in the United States from 1997–2006. We find that not-for-profit hospitals responded more aggressively than for-profit hospitals. The difference can be partly explained by not-for-profit hospitals being more sensitive to the potential reputational damage of medical malpractice liability. These findings highlight not-for-profit as a unique governance form and its influence on strategy.

Valuing Stakeholder Governance: Property Rights, Community Mobilization, and Firm Value

Sinziana Dorobantu (NYU Stern School of Business)
Kate Odziemkowska (University of Pennsylvania, Wharton)

Abstract : 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.

Corporate Purpose and Financial Performance

Claudine Gartenberg (Wharton School/NYU Stern)
Andrea Prat (Columbia University)
George Serafeim (Harvard Business School)

Abstract : We construct a measure of corporate purpose within a sample of US companies based on approximately 500,000 survey responses of worker perceptions about their employers. We find that this measure of purpose is not related to financial performance. However, high purpose firms come in two forms: firms characterized by high camaraderie between workers and firms characterized by high clarity from management. We document that firms exhibiting both high purpose and clarity have systematically higher future accounting and stock market performance, even after controlling for current performance, and that this relation is driven by the perceptions of middle management and professional staff rather than senior executives, hourly or commissioned workers. Taken together, these results suggest that firms with mid-level employees with strong beliefs in the purpose of their organization experience better performance.

Winning Us with Trifles: Adverse Selection in the Use of Philanthropy As Insurance

Jiao Luo (University of Minnesota)
Aseem Kaul (University of Minnesota)
Haram Seo (University of Minnesota)

Abstract : We study the use of corporate philanthropy as a form of reputation insurance, developing a formal model of such insurance in a market with clean and dirty firms and examining how the equilibrium conditions change depending on how active and informed social stakeholders are, how altruistic firms are, and how much control they have over the probability of accidents. We then test the predictions from this model in the US Petroleum industry, and find that philanthropic donations offer insurance-like benefits but are also positively associated with subsequent oil spills—firms that give more, spill more. These results are consistent with an adverse selection / moral hazard equilibrium and suggest that the use of philanthropy as reputation insurance may benefit firms at the cost of society.