Alternative corporate governance paradigm and corporate financing: Capital structure decisions in employee-governed firms

Assuming an alternative corporate governance paradigm that puts employees in the firm’s governance structures, as well as understanding their objective functions, we investigate capital structure decisions in employee-governed firms. Examining corporate capital structure decisions in 12 European countries, we provide strong empirical evidence of employees’ conservatism in capital structure choice. We find that employee-governed firms operate with significantly lower leverage and that employee-governed firms are significantly less levered at the same amount of earnings volatility than firms governed by other stakeholders. We also find evidence that employee-governed firms, at least in some countries, rely on internal resources to a larger extent. However, we did not find evidence that employee-governed firms have to pledge more collateral to obtain debt financing. In addition to this, we find evidence that employee-governed firms choose debt of shorter maturity and, somewhat surprisingly, that employee-governed firms in some countries are faced with lower cost of debt compared to firms governed by other stakeholders and not higher cost of debt as expected because of credit rationing and limited borrowing capacity.