Employee Treatment and Firm Leverage: A Test of the Stakeholder Theory of Capital Structure

62 Pages Posted: 18 May 2010

See all articles by Kee-Hong Bae

Kee-Hong Bae

York University - Schulich School of Business

Jun-Koo Kang

Nanyang Technological University (NTU) - Nanyang Business School

Jin Wang

Wilfrid Laurier University - Lazaridis School of Business & Economics

Date Written: May 18, 2010

Abstract

We investigate the stakeholder theory of capital structure from the perspective of a firm’s relationships with its employees. We find that firms that treat their employees fairly (as measured by high employee-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 list of Fortune Magazine’s “100 Best Companies to Work For.” These results suggest that a firm’s incentive/ability to offer fair employee treatment is an important determinant of its financing policy.

Keywords: Capital structure, stakeholder, employee treatment

JEL Classification: G32

Suggested Citation

Bae, Kee-Hong and Kang, Jun-Koo and Wang, Jin, Employee Treatment and Firm Leverage: A Test of the Stakeholder Theory of Capital Structure (May 18, 2010). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=1610170

Kee-Hong Bae

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada
416-736-2100 ext) 20248 (Phone)
416-736-5687 (Fax)

Jun-Koo Kang (Contact Author)

Nanyang Technological University (NTU) - Nanyang Business School ( email )

Nanyang Avenue, Block S3-01b-54
Singapore, 639798
Singapore
(+65) 6790-5662 (Phone)
(+65) 6791-3697 (Fax)

HOME PAGE: http://www.nbs.ntu.edu.sg/nbs_corporate/divisions/bnf/index.asp

Jin Wang

Wilfrid Laurier University - Lazaridis School of Business & Economics ( email )

Waterloo, Ontario N2L 3C5
Canada

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