Can Stakeholder Orientation Improve Inventory Efficiency? Evidence from a Quasi-Natural Experiment

In this study, we ask if corporate social responsibility (CSR) allows firms facing high business uncertainty to hold less inventory. More specifically, we ask if improved relationship with suppliers can enhance firms’ resilience to negative supply chain shocks, and thereby allow them to carry lower level of raw materials; better relationship with employees attract skilled labor, and thereby reduce the need to hold more work-in-process inventory; catering into customers’ interest increase customer loyalty, and thereby enable firms to hold fewer finished goods.

Using U.S. state legislatures’ staggered adoption of constituency statutes over a 24-year period (1984–2007) as a quasi-natural experiment, we show that greater stakeholder orientation significantly increases firms’ inventory efficiency. Our baseline result shows that the enactment of the statutes leads to an economically significant 4.2% increase in inventory turnover for the treatment firms relative to firms incorporated in states that did not pass such statutes, indicating that stakeholder orientation improves inventory efficiency.

Building on the baseline result, we next explore the impact of stakeholder attention on disaggregated components of inventories: raw materials, work-in-process, and finished goods. We conduct two tests. First, we investigate whether the effect stems from the role of stakeholder-friendly policies in alleviating environmental uncertainty. Consistent with our prediction, the results show that the effect of stakeholder orientation comes mainly from the firms operating in a dynamic environment.

Second, we evaluate the potential channels through which stakeholder attention can increase firms’ resilience to dynamic environment, allowing them to improve inventory performance. We focus on two types of stakeholders: employees and customers. If stakeholder-friendly actions increase inventory efficiency by improving employee engagement, we should observe a stronger effect of stakeholder attention in firms relying more on human capital. Also, if customer relationship is an important channel, we should observe a stronger effect of stakeholder attention in firms in which relationships with customers are difficult to manage. Our findings provide supporting evidence for these arguments. After the passage of constituency statutes, we find greater improvement in inventory efficiency for labor-intensive firms, as well as firms with lower customer concentration.

As a final step, we investigate whether inventory efficiency is more value-enhancing after the adoption of constituency statutes. The results show that, after the passage of the statutes, the positive association between inventory efficiency and firm performance strengthens. More importantly, we find that this pattern is driven mostly by firms facing higher levels of environmental dynamism, reinforcing our earlier argument that stakeholder orientation matters more in such firms.

To the best of our knowledge, this study provides the first piece of empirical evidence on the relationship between stakeholder orientation and inventory efficiency. This study also contributes to the literature on the value-relevance of corporate social responsibility by discovering a new channel through which socially responsible actions can enhance firm value. Specifically, we find that these actions can increase firm value through the production process channel—by improving inventory efficiency.