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

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  • Bae, Kee-Hong
  • Kang, Jun-Koo
  • Wang, Jin
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    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.

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    Article provided by Elsevier in its journal Journal of Financial Economics.

    Volume (Year): 100 (2011)
    Issue (Month): 1 (April)
    Pages: 130-153

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    Handle: RePEc:eee:jfinec:v:100:y:2011:i:1:p:130-153
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505576

    Keywords: Capital structure Employee treatment Stakeholder KLD rating Endogeneity;

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    Cited by:

    1. Claessens, Stijn & Yurtoglu, B. Burcin, 2013. "Corporate governance in emerging markets: A survey," Emerging Markets Review, Elsevier, vol. 15(C), pages 1-33.
    2. Wang, Jin, 2012. "Do firms' relationships with principal customers/suppliers affect shareholders' income?," Journal of Corporate Finance, Elsevier, vol. 18(4), pages 860-878.
    3. Akyol, Ali C. & Verwijmeren, Patrick, 2013. "Human capital costs, firm leverage, and unemployment rates," Journal of Financial Intermediation, Elsevier, vol. 22(3), pages 464-481.
    4. Najah Attig & Narjess Boubakri & Sadok El Ghoul & Omrane Guedham, . "International Diversification and Corporate Social Responsibility," Finance Working Papers 12-11/2013, School of Business Administration, American University of Sharjah.
    5. El Ghoul, Sadok & Guedhami, Omrane & Kwok, Chuck C.Y. & Mishra, Dev R., 2011. "Does corporate social responsibility affect the cost of capital?," Journal of Banking & Finance, Elsevier, vol. 35(9), pages 2388-2406, September.
    6. repec:pra:mprapa:40679 is not listed on IDEAS
    7. Nie, Huihua & Zhao, Huainan, 2013. "Leverage and Employee Death: Evidence from China’s Coalmining Industry," MPRA Paper 52343, University Library of Munich, Germany.
    8. Borgers, Arian & Derwall, Jeroen & Koedijk, Kees & ter Horst, Jenke, 2013. "Stakeholder relations and stock returns: On errors in investors' expectations and learning," Journal of Empirical Finance, Elsevier, vol. 22(C), pages 159-175.
    9. Matthias Fahn & Valeria Merlo & Georg Wamser, 2014. "The Commitment Role of Equity Financing," CESifo Working Paper Series 4841, CESifo Group Munich.
    10. Deng, Xin & Kang, Jun-koo & Low, Buen Sin, 2013. "Corporate social responsibility and stakeholder value maximization: Evidence from mergers," Journal of Financial Economics, Elsevier, vol. 110(1), pages 87-109.
    11. Franklin Allen & Elena Carletti & Robert Marquez, 2014. "Stakeholder Governance, Competition and Firm Value," CESifo Working Paper Series 4652, CESifo Group Munich.
    12. Borgers, A.C.T., 2014. "Responsible investing : New insights into performance and tastes," Other publications TiSEM 587e777f-c242-4a44-968e-7, School of Economics and Management.

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