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Employee Representation and Financial Leverage

60 Pages Posted: 31 Dec 2014 Last revised: 20 Oct 2016

Chen Lin

The University of Hong Kong - Faculty of Business and Economics

Thomas Schmid

The University of Hong Kong - Faculty of Business and Economics

Yuhai Xuan

University of Illinois at Urbana-Champaign - Department of Finance

Date Written: October 16, 2016

Abstract

We analyze how direct employee voice affects financial leverage. German law mandates that firms' supervisory boards consist of an equal number of employees' and owners' representatives. This requirement, however, applies only to firms with over 2,000 domestic employees. We exploit this discontinuity and the law's introduction in 1976 for identification and find that direct employee power increases financial leverage. This is explained by a supply side effect: as banks' interests are similar to those of employees, higher employee power reduces agency conflicts with debt providers, leading to better financing conditions. These findings reveal a novel mechanism of direct employee influence.

Keywords: Capital structure, financial leverage, employee representation, labor rights, bank ownership, tax reform

JEL Classification: J50, G32

Suggested Citation

Lin, Chen and Schmid, Thomas and Xuan, Yuhai, Employee Representation and Financial Leverage (October 16, 2016). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2544223 or http://dx.doi.org/10.2139/ssrn.2544223

Chen Lin

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Thomas Schmid (Contact Author)

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Yuhai Xuan

University of Illinois at Urbana-Champaign - Department of Finance ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

HOME PAGE: http://www.business.illinois.edu/yhxuan/

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