The Stability of Dividends and Wages: Effects of Competitor Inflexibility

60 Pages Posted: 26 Oct 2016 Last revised: 13 Jun 2018

Daniel A. Rettl

University of Georgia - Department of Banking and Finance; Humboldt University of Berlin - School of Business and Economics

Alex Stomper

Humboldt University of Berlin - School of Business and Economics

Josef Zechner

Vienna University of Economics and Business

Date Written: May 26, 2018

Abstract

We analyze how risk sharing between a firm’s employees and owners depends on its competitors’ response to industry-wide shocks. Focusing on the electricity industry, we obtain a sample of firms with exposure to similar industry risks but different production technologies. We document that firms are more exposed to industry shocks, when their competitors use lower-cost production technologies. This "competitor inflexibility" destabilizes payouts to equityholders, but there is no evidence that it compromises wage stability. Firms do not share systematic risk due to competitor inflexibility with their employees and set wages as if their shareholders’ risk preferences were given.

Keywords: risk-sharing within firms, payout stability, wage stability, competitor inflexibility

JEL Classification: D22, G35, J33, J41, L13, L94

Suggested Citation

Rettl, Daniel A. and Stomper, Alex and Zechner, Josef, The Stability of Dividends and Wages: Effects of Competitor Inflexibility (May 26, 2018). CFS Working Paper, No. 549; European Corporate Governance Institute (ECGI) - Finance Working Paper No. 563/2018. Available at SSRN: https://ssrn.com/abstract=2858926 or http://dx.doi.org/10.2139/ssrn.2858926

Daniel A. Rettl

University of Georgia - Department of Banking and Finance ( email )

Terry College of Business
Athens, GA 30602-6253
United States

Humboldt University of Berlin - School of Business and Economics ( email )

Spandauer Str. 1
Berlin, D-10099
Germany

Alex Stomper

Humboldt University of Berlin - School of Business and Economics ( email )

Spandauer Str. 1
Berlin, D-10099
Germany

Josef Zechner (Contact Author)

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien A-1019
Austria

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