Agency cost is a major factor that constrains corporate finance decision making. Current corporate governance theory focuses primarily on agency costs of managers and existing literature studies extensively on this aspect. This dissertation studies agency costs from a unique point of view: it addresses the agency costs of creditors and employees. It tests the relationship between creditor rights as well as employee rights and corporations’ financing and dividend payment decisions across countries.
Based on a sample of 182, 182 firm-year observations from 21,663 unique firms over 52 countries, this study uses the year- and industry-fixed effects Tobit model to test the impacts of creditor rights and labor rights on debt ratio in different countries. The empirical results reveal a positive relationship between employee rights and firms’ use of debt and a negative relationship between creditor rights and firm debt ratio. Such relationships hold valid when tests are implemented by using pooled country sample, country mean of residuals, and different country-group sub-samples. The results imply that in countries where employee rights are high, shareholders will use more debt obligation to reduce possibility of exploitation by employees whereas in countries where creditor rights are high, it is harder for shareholders to get a favorable debt contract and they will reduce the use of debt capital.
Running fixed effects Logit and Tobit models, this study also documents that labor rights are negatively related to firms’ decision to pay dividends and dividend payment amounts. This relationship is reinforced to be more salient in civil law countries where shareholder rights are weak.
The empirical results are robust by controlling for sample selection bias, test model specification, and a series of country-level control variables. The explaining power of the major creditor rights and labor rights variables keeps significant statistically, implying that the empirical results remain valid after taking country-specific economic characteristics into account across countries.
This is the first study that examines agency costs of employees in corporate finance context explicitly. It takes all stakeholders into account when studying agency problems and sheds light on the interaction relationship among shareholders, creditors, and employees across countries. The empirical results of this study provide a new perspective to interpret international variations in financial leverage and dividend policy in the world.