We find a causal effect from capital structure to employee wages, not vice versa. Firms with more debt pay lower wages. The negative effect is robust and strong in state-owned firms and increases in SOEs with larger size, higher leverage ratio, lower profitability, and less growth opportunities. Overall, the results are consistent with the hypothesis that SOEs’ managers with greater control rights that are prone to overpay their employees at expense of ultimate owner, the government. Debt can serve as monitoring device to reduce the managerial agency costs. A standard deviation increase in leverage ratio can increase SOEs’ median profit per employee by 2.03% and double SOEs profitability.
Although researchers have been long aware of the interaction between labor and capital markets 1 , no consensus has been reached on the causal relation and how debt policy may affect employee wages. As the employee is usually simplified as firm manager in the theoretical analysis, the empirical studies more focus on the relation between capital structure decision and top managers The study on the relation between employee and capital structure is important for the following reasons. First, recent evidence suggests that a firm’s non-financial stakeholders can have a significant influence on its capital decisions (Titman, 1984; Titman and Wessels, 1988). However,the role of employee, one of the most important stakeholders, in capital structure decision only receives minimum attention (Bae, Kang, and Wang 2011). Second, CEO and other top managers are not the only employee group that will suffer when firms enter financial distress or bankruptcy. Gilson (1989, 1990), Jacobson, LaLonde, and Sullivan (1993), and Gilson and Vetsuypens (1993) all find that replaced employees bear large personal costs. Hence, the workforce in a firm is expected to related to its capital structure decision. Third, psychology research has already documented that job security is one of the most important determinants of. The existing literature has shown that firm managers exert significant influence on firm capital structure decision.
Third, psychology research has already documented that job security is one of the most important determinants of human happiness. The detrimental effect of an involuntary job loss on overall happiness is more severe than that of inflation on happiness (see Helliwell, 2003; Di Tella, MacCulloch, and Oswald , 2001). Thus, it is important to know whether and how a firm’s capital structure affects employee welfare. Finally, the study on the interaction between employee wages and capital structure may help us understand why firms underutilize debt and why firms’ leverage ratios are fairly persistent (Lemmon, Roberts, and Zender, 2008).
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Large Sample Evidence on Capital Structure and Employee Wages
