Banks and Labor as Stakeholders : Impact on Economic Performance

Traditionally, the impacts of the rights of fi nancial institutions and workers on corporate performance have been analyzed independently. Yet, theory clearly indicates that the combination of relative powers of different stakeholders affects a fi rm overall performance. Using U.S. state level and state-industry level data, we investigate how output growth is affected by bank branch deregulation and employment protection occurring over 19721993. We fi nd that fi nancial liberalization positively impact overall state growth but greater workers’ rights affects it ambiguously. At the industry level, however, employment protection promotes those industries that are more knowledge intensive, while the effect of fi nancial liberalization does not differ across industries that vary in external fi nancing dependency. The results hold controlling for changes in shareholders’ rights, which itself is not signifi cant. The fi ndings suggest that fi nancial liberalization operates mostly through an effi ciency channel, better reallocating resources across sectors, while employment protection creates higher incentives and encourages more sector-specifi c, human capital investments. Overall, the results show that the strength of stakeholders’ protection affects performance through effi ciency channels and provide support for a stakeholders’ view of corporate governance.