IDEAS home Printed from https://ideas.repec.org/a/eee/jfinec/v100y2011i1p130-153.html
   My bibliography  Save this article

Employee treatment and firm leverage: A test of the stakeholder theory of capital structure

Author

Listed:
  • Bae, Kee-Hong
  • Kang, Jun-Koo
  • Wang, Jin

Abstract

We investigate the stakeholder theory of capital structure from the perspective of a firm's relations with its employees. We find that firms that treat their employees fairly (as measured by high employee[hyphen (true graphic)]friendly ratings) maintain low debt ratios. This result is robust to a variety of model specifications and endogeneity issues. The negative relation between leverage and a firm's ability to treat employees fairly is also evident when we measure its ability by whether it is included in the Fortune magazine list, "100 Best Companies to Work For." These results suggest that a firm's incentive or ability to offer fair employee treatment is an important determinant of its financing policy.

Suggested Citation

  • Bae, Kee-Hong & Kang, Jun-Koo & Wang, Jin, 2011. "Employee treatment and firm leverage: A test of the stakeholder theory of capital structure," Journal of Financial Economics, Elsevier, vol. 100(1), pages 130-153, April.
  • Handle: RePEc:eee:jfinec:v:100:y:2011:i:1:p:130-153
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0304-405X(10)00255-2
    Download Restriction: Full text for ScienceDirect subscribers only
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. MacKie-Mason, Jeffrey K, 1990. "Do Taxes Affect Corporate Financing Decisions?," Journal of Finance, American Finance Association, vol. 45(5), pages 1471-1493, December.
    2. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
    3. Huang, Rongbing & Ritter, Jay R., 2009. "Testing Theories of Capital Structure and Estimating the Speed of Adjustment," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 44(2), pages 237-271, April.
    4. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
    5. A. Smith, Jeffrey & E. Todd, Petra, 2005. "Does matching overcome LaLonde's critique of nonexperimental estimators?," Journal of Econometrics, Elsevier, vol. 125(1-2), pages 305-353.
    6. Arellano, Manuel & Bover, Olympia, 1995. "Another look at the instrumental variable estimation of error-components models," Journal of Econometrics, Elsevier, vol. 68(1), pages 29-51, July.
    7. James J. Heckman & Hidehiko Ichimura & Petra E. Todd, 1997. "Matching As An Econometric Evaluation Estimator: Evidence from Evaluating a Job Training Programme," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 64(4), pages 605-654.
    8. Murray Z. Frank & Vidhan K. Goyal, 2009. "Capital Structure Decisions: Which Factors Are Reliably Important?," Financial Management, Financial Management Association International, vol. 38(1), pages 1-37, March.
    9. Lee, Peggy M. & Wahal, Sunil, 2004. "Grandstanding, certification and the underpricing of venture capital backed IPOs," Journal of Financial Economics, Elsevier, vol. 73(2), pages 375-407, August.
    10. Augustin Landier & Vinay B. Nair & Julie Wulf, 2009. "Trade-offs in Staying Close: Corporate Decision Making and Geographic Dispersion," The Review of Financial Studies, Society for Financial Studies, vol. 22(3), pages 1119-1148.
    11. Eugene F. Fama, 2002. "Testing Trade-Off and Pecking Order Predictions About Dividends and Debt," The Review of Financial Studies, Society for Financial Studies, vol. 15(1), pages 1-33, March.
    12. Berger, Philip G & Ofek, Eli & Yermack, David L, 1997. "Managerial Entrenchment and Capital Structure Decisions," Journal of Finance, American Finance Association, vol. 52(4), pages 1411-1438, September.
    13. Faleye, Olubunmi & Mehrotra, Vikas & Morck, Randall, 2006. "When Labor Has a Voice in Corporate Governance," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 41(3), pages 489-510, September.
    14. Jeffrey M Wooldridge, 2010. "Econometric Analysis of Cross Section and Panel Data," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262232588, April.
    15. Paul Gompers & Joy Ishii & Andrew Metrick, 2003. "Corporate Governance and Equity Prices," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 118(1), pages 107-156.
    16. Flannery, Mark J. & Rangan, Kasturi P., 2006. "Partial adjustment toward target capital structures," Journal of Financial Economics, Elsevier, vol. 79(3), pages 469-506, March.
    17. David R. Graham & Daniel P. Kaplan & David S. Sibley, 1983. "Efficiency and Competition in the Airline Industry," Bell Journal of Economics, The RAND Corporation, vol. 14(1), pages 118-138, Spring.
    18. Allen N. Berger & Timothy H. Hannan, 1998. "The Efficiency Cost Of Market Power In The Banking Industry: A Test Of The "Quiet Life" And Related Hypotheses," The Review of Economics and Statistics, MIT Press, vol. 80(3), pages 454-465, August.
    19. Perotti, Enrico C & Spier, Kathryn E, 1993. "Capital Structure as a Bargaining Tool: The Role of Leverage in Contract Renegotiation," American Economic Review, American Economic Association, vol. 83(5), pages 1131-1141, December.
    20. Xin Chang & Sudipto Dasgupta, 2009. "Target Behavior and Financing: How Conclusive Is the Evidence?," Journal of Finance, American Finance Association, vol. 64(4), pages 1767-1796, August.
    21. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-329, May.
    22. repec:bla:jfinan:v:59:y:2004:i:4:p:1585-1618 is not listed on IDEAS
    23. Rajan, Raghuram G & Zingales, Luigi, 1995. "What Do We Know about Capital Structure? Some Evidence from International Data," Journal of Finance, American Finance Association, vol. 50(5), pages 1421-1460, December.
    24. Frank, Murray Z. & Goyal, Vidhan K., 2003. "Testing the pecking order theory of capital structure," Journal of Financial Economics, Elsevier, vol. 67(2), pages 217-248, February.
    25. Jonathan B. Berk & Richard Stanton & Josef Zechner, 2010. "Human Capital, Bankruptcy, and Capital Structure," Journal of Finance, American Finance Association, vol. 65(3), pages 891-926, June.
    26. Antoniou, Antonios & Guney, Yilmaz & Paudyal, Krishna, 2008. "The Determinants of Capital Structure: Capital Market-Oriented versus Bank-Oriented Institutions," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 43(1), pages 59-92, March.
    27. Graham, John R., 1996. "Debt and the marginal tax rate," Journal of Financial Economics, Elsevier, vol. 41(1), pages 41-73, May.
    28. Mark T. Leary & Michael R. Roberts, 2005. "Do Firms Rebalance Their Capital Structures?," Journal of Finance, American Finance Association, vol. 60(6), pages 2575-2619, December.
    29. Bergman, Nittai K. & Jenter, Dirk, 2007. "Employee sentiment and stock option compensation," Journal of Financial Economics, Elsevier, vol. 84(3), pages 667-712, June.
    30. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
    31. repec:bla:jfinan:v:43:y:1988:i:1:p:1-19 is not listed on IDEAS
    32. Nickell, Stephen J, 1996. "Competition and Corporate Performance," Journal of Political Economy, University of Chicago Press, vol. 104(4), pages 724-746, August.
    33. Maksimovic, Vojislav & Titman, Sheridan, 1991. "Financial Policy and Reputation for Product Quality," The Review of Financial Studies, Society for Financial Studies, vol. 4(1), pages 175-200.
    34. Stephen G. Bronars & Donald R. Deere, 1991. "The Threat of Unionization, the Use of Debt, and the Preservation of Shareholder Wealth," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 106(1), pages 231-254.
    35. Klasa, Sandy & Maxwell, William F. & Ortiz-Molina, Hernán, 2009. "The strategic use of corporate cash holdings in collective bargaining with labor unions," Journal of Financial Economics, Elsevier, vol. 92(3), pages 421-442, June.
    36. Verwijmeren, Patrick & Derwall, Jeroen, 2010. "Employee well-being, firm leverage, and bankruptcy risk," Journal of Banking & Finance, Elsevier, vol. 34(5), pages 956-964, May.
    37. James J. Heckman & Hidehiko Ichimura & Petra Todd, 1998. "Matching As An Econometric Evaluation Estimator," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 65(2), pages 261-294.
    38. Jaggia, Priscilla Butt & Thakor, Anjan V, 1994. "Firm-Specific Human Capital and Optimal Capital Structure," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(2), pages 283-308, May.
    39. Dasgupta, Sudipto & Sengupta, Kunal, 1993. "Sunk Investment, Bargaining and Choice of Capital Structure," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(1), pages 203-220, February.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ampenberger, Markus & Schmid, Thomas & Achleitner, Ann-Kristin & Kaserer, Christoph, 2009. "Capital structure decisions in family firms: empirical evidence from a bank-based economy," CEFS Working Paper Series 2009-05, Technische Universität München (TUM), Center for Entrepreneurial and Financial Studies (CEFS).
    2. Mai, Nhat Chi, 2012. "Market timing, taxes and capital structure: evidence from Vietnam," OSF Preprints t3mvs, Center for Open Science.
    3. Bontempi, Maria Elena & Bottazzi, Laura & Golinelli, Roberto, 2020. "A multilevel index of heterogeneous short-term and long-term debt dynamics," Journal of Corporate Finance, Elsevier, vol. 64(C).
    4. Dang, Viet Anh & Kim, Minjoo & Shin, Yongcheol, 2014. "Asymmetric adjustment toward optimal capital structure: Evidence from a crisis," International Review of Financial Analysis, Elsevier, vol. 33(C), pages 226-242.
    5. Ebrahim, M. Shahid & Girma, Sourafel & Shah, M. Eskandar & Williams, Jonathan, 2014. "Dynamic capital structure and political patronage: The case of Malaysia," International Review of Financial Analysis, Elsevier, vol. 31(C), pages 117-128.
    6. Belkhir, Mohamed & Maghyereh, Aktham & Awartani, Basel, 2016. "Institutions and corporate capital structure in the MENA region," Emerging Markets Review, Elsevier, vol. 26(C), pages 99-129.
    7. Feld, Lars P. & Heckemeyer, Jost H. & Overesch, Michael, 2013. "Capital structure choice and company taxation: A meta-study," Journal of Banking & Finance, Elsevier, vol. 37(8), pages 2850-2866.
    8. Dang, Viet Anh & Kim, Minjoo & Shin, Yongcheol, 2015. "In search of robust methods for dynamic panel data models in empirical corporate finance," Journal of Banking & Finance, Elsevier, vol. 53(C), pages 84-98.
    9. Kim, Tae-Nyun & Kim, Kihun, 2018. "External cost of leverage adjustment: Evidence from defined benefit pension plans," Journal of Economics and Business, Elsevier, vol. 96(C), pages 1-14.
    10. Mário Santos & António Moreira & Elisabete Vieira, 2014. "Ownership concentration, contestability, family firms, and capital structure," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 18(4), pages 1063-1107, November.
    11. Mohamed, Hisham Hanifa & Masih, Mansur & Bacha, Obiyathulla I., 2015. "Why do issuers issue Sukuk or conventional bond? Evidence from Malaysian listed firms using partial adjustment models," Pacific-Basin Finance Journal, Elsevier, vol. 34(C), pages 233-252.
    12. Biswajit Ghose & Kailash Chandra Kabra, 2019. "Capital Structure Dynamics and Financing Imbalance: Evidence from an Emerging Economy," Emerging Economy Studies, International Management Institute, vol. 5(2), pages 103-124, November.
    13. Dang, Viet Anh & Kim, Minjoo & Shin, Yongcheol, 2012. "Asymmetric capital structure adjustments: New evidence from dynamic panel threshold models," Journal of Empirical Finance, Elsevier, vol. 19(4), pages 465-482.
    14. Yildirim, Ramazan & Masih, Mansur & Bacha, Obiyathulla Ismath, 2018. "Determinants of capital structure: evidence from Shari'ah compliant and non-compliant firms," Pacific-Basin Finance Journal, Elsevier, vol. 51(C), pages 198-219.
    15. Viet Anh Dang, 2011. "Testing Capital Structure Theories Using Error Correction Models: Evidence From The Uk, France And Germany," Post-Print hal-00732527, HAL.
    16. Biswajit Ghose & Kailash Chandra Kabra, 2019. "Firm Profitability and Adjustment of Capital Structure: Indian Evidence," Vision, , vol. 23(3), pages 297-308, September.
    17. Biswajit Ghose, 2017. "Impact of Business Group Affiliation on Capital Structure Adjustment Speed: Evidence from Indian Manufacturing Sector," Emerging Economy Studies, International Management Institute, vol. 3(1), pages 54-67, May.
    18. Giorgio Canarella & Stephen M. Miller, 2019. "Determinants of Optimal Capital Structure and Speed of Adjustment: Evidence from the U.S. ICT Sector," Working papers 2019-06, University of Connecticut, Department of Economics.
    19. Temimi, Akram & Zeitun, Rami & Mimouni, Karim, 2016. "How does the tax status of a country impact capital structure? Evidence from the GCC region," Journal of Multinational Financial Management, Elsevier, vol. 37, pages 71-89.
    20. Elsas, Ralf & Florysiak, David, 2008. "Empirical Capital Structure Research: New Ideas, Recent Evidence, and Methodological Issues," Discussion Papers in Business Administration 4743, University of Munich, Munich School of Management.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jfinec:v:100:y:2011:i:1:p:130-153. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/505576 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.