Financial and Non-Financial Risk Management: Evidence from Labor Law Violations

Abstract

Financial hedging is only one aspect of corporate risk management. Rather, firms balance financial and operational risks in their overall risk management strategies. This article examines how labor law violations at prominent US companies via surprise Occupational Safety and Health Administration inspections affect supplier decisions. We show that labor law violations decrease supplier leverage and net debt issues. Furthermore, the impact on supplier leverage is more significant when suppliers invest in relationship-specific assets and possess a relatively weak bargaining power. Overall, companies manage their financial risk as part of a broader risk management strategy that includes monitoring operational risks downstream in the supply chain.

Keywords: Risk Management, Supply Chain, Workplace Safety, CSR, Leverage. JEL Classification codes: G30, G32