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Are labor laws and employee welfare complements in determining leverage ratios?

Author

Listed:
  • Han, Hien Duc
  • Gupta, Kartick
  • Krishnamurti, Chandrasekhar

Abstract

Extant literature suggests that employee-friendly firms maintain lower leverage ratios in the US market, consistent with the stakeholder theory of capital structure. We examine the issue in a cross-country setting by using 33,769 firm-year observations from 41 countries. We find the firms that move from the bottom quartile to the top quartile of the Employee Welfare Index (EWI) decrease leverage ratio by approximately 180 basis points. However, country-level labor protection, and labor mobility in flexible labor markets are expected to exert strong influences on firm-level employee-friendly practices and corporate financial leverage. Importantly, we show that the firm-level leverage is relatively higher for employee-friendly firms when the country-level labor rights and protection are strong, suggesting that firms respond strategically to hard-bargaining by labor. In contrast, firm-level leverage is lower for employee-friendly firms in countries with flexible labor markets, implying that firms react in the opposite direction to soft-bargaining by labor.

Suggested Citation

  • Han, Hien Duc & Gupta, Kartick & Krishnamurti, Chandrasekhar, 2024. "Are labor laws and employee welfare complements in determining leverage ratios?," Pacific-Basin Finance Journal, Elsevier, vol. 88(C).
    • Handle: RePEc:eee:pacfin:v:88:y:2024:i:c:s0927538x2400297x
    DOI: 10.1016/j.pacfin.2024.102545
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    More about this item

    Keywords

    Employee welfare; Leverage; Human capital; Labor markets; Country-level determinants; Bargaining power;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J28 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Safety; Job Satisfaction; Related Public Policy

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