Pay Transparency and Financial Leverage

Abstract

Exploiting staggered adoptions of pay transparency laws, we find pay transparency increases financial leverage. The effect is more pronounced among firms with greater threats of labor collective bargaining, such as those in Democratic leaning states and in industries with higher union coverage, and lower worker outside options. Labor disputes appear a plausible underlying mechanism through which pay transparency increases firm leverage. Our evidence is consistent with the conjecture that pay transparency induces firms to strategically increase debt level to improve their bargaining position vis-à-vis labor. Our paper sheds new light on the effects of pay transparency on corporate financial policies.

Keywords: Pay Transparency, Financial Leverage, Strategic Bargaining, Labor Dispute.

JEL Classification: G30, G32, K31, J51, J52.