Employee Treatment and Firm Leverage: A Test of the Stakeholder Theory of Capital Structure
62 Pages Posted: 18 May 2010
Date Written: May 18, 2010
We investigate the stakeholder theory of capital structure from the perspective of a firm’s relationships with its employees. We find that firms that treat their employees fairly (as measured by high employee-friendly ratings) maintain low debt ratios. This result is robust to a variety of model specifications and endogeneity issues. The negative relation between leverage and a firm’s ability to treat employees fairly is also evident when we measure its ability by whether it is included in the list of Fortune Magazine’s “100 Best Companies to Work For.” These results suggest that a firm’s incentive/ability to offer fair employee treatment is an important determinant of its financing policy.
Keywords: Capital structure, stakeholder, employee treatment
JEL Classification: G32
Suggested Citation: Suggested Citation