Theoretical framework
Empirical results
Conclusion
Employee representation and financial leverage
CSEF-EIEF-SITE Conference 2015, Rome
Chen Lin1
Thomas Schmid1
1
2
Yuhai Xuan2
University of Hong Kong
University of Illinois at Urbana-Champaign
August 31, 2015
Chen Lin, Thomas Schmid, Yuhai Xuan
Employee representation and financial leverage
Theoretical framework
Empirical results
Conclusion
Summary
Research question: What is the impact of employee power on
financial leverage?
Setting: Direct influence of employees via supervisory board seats in
German firms
Identification: 50% employee representatives if > 2,000 domestic
employees by law → regression discontinuity design
Main finding: Employee power increases financial leverage
Explanation: Interest alignment with debt providers as employee
power reduces firm risk
Chen Lin, Thomas Schmid, Yuhai Xuan
Employee representation and financial leverage
Theoretical framework
Empirical results
Conclusion
Content
1
Theoretical framework
Background
Hypotheses
Empirical setting
2
Empirical results
Main results
Robustness
Further tests
3
Conclusion
Chen Lin, Thomas Schmid, Yuhai Xuan
Employee representation and financial leverage
Theoretical framework
Empirical results
Conclusion
Background
Hypotheses
Empirical setting
Employee representation in Germany
Board system
Two-tier board system with management and supervisory board
(“Vorstand” and “Aufsichtsrat”)
Management board is responsible for the daily business; supervisory board
has to elect and supervise managers
Employee representation
Employee co-determination is regulated by law (“MitbestG”)
This law only applies to firms with > 2,000 domestic employees
Supervisory board has to consist of an equal number of owners’ and
employees’ representatives (parity employee representation, PER) →
direct voice
Literature
Not the first to exploit this setting (e.g. Fauver & Fuerst 2006, Kim, Maug &
Schneider 2015)
Chen Lin, Thomas Schmid, Yuhai Xuan
Employee representation and financial leverage
Theoretical framework
Empirical results
Conclusion
Background
Hypotheses
Empirical setting
The influence of employees - the Volkswagen example
(a) Martin Winterkorn (CEO)
(b) Ferdinand Piech (Chairman)
(c) Bernd Osterloh
(d) Berthold Huber
Source: Bild & Welt
Chen Lin, Thomas Schmid, Yuhai Xuan
Employee representation and financial leverage
Theoretical framework
Empirical results
Conclusion
Background
Hypotheses
Empirical setting
The influence of employees - the Volkswagen example
Source: Volkswagen AG
Chen Lin, Thomas Schmid, Yuhai Xuan
Employee representation and financial leverage
Theoretical framework
Empirical results
Conclusion
Background
Hypotheses
Empirical setting
The influence of employees - the Volkswagen example
Chen Lin, Thomas Schmid, Yuhai Xuan
Employee representation and financial leverage
Theoretical framework
Empirical results
Conclusion
Background
Hypotheses
Empirical setting
Literature
Bargaining literature
A large literature argues that firms use debt as a strategic bargaining tool
to reduce the influence of labor
For example Bronars & Deere (1991), Perotti & Spier (1993), Matsa
(2010)
Job security literature
Another literature focuses on how unemployment protection/benefits and
job risk affect leverage
For example Berk, Stanton & Zechner (2010), Agrawal & Matsa (2013),
Simintzi, Vig & Volpin (2014)
Indirect influence
Both strands of the literature mainly focus on an “indirect” influence of labor
on corporate decision making, e.g., via industry-level unionization or
employment protection laws
Chen Lin, Thomas Schmid, Yuhai Xuan
Employee representation and financial leverage
Theoretical framework
Empirical results
Conclusion
Background
Hypotheses
Empirical setting
The setting of this paper is different
Legally mandated shift of power
Power of employees in the firm increases
At the same time, the influence of owners’ decreases
We look at the “direct” influence of employees
Employee representatives sit on the board and are firm insiders
This makes the usage of debt as “bargaining tool” unattractive for
managers as employee representatives possess insider knowledge, can fire
managers, and are permanent monitors of executives
In particular, they are more likely to monitor managers tightly and less
likely to re-elect them if debt levels are (too) high
Consequences
Not bargaining or job security concerns, but another effect may be of first-order
importance if employees have a direct and legally binding voice: interest
alignment with banks
Chen Lin, Thomas Schmid, Yuhai Xuan
Employee representation and financial leverage
Theoretical framework
Empirical results
Conclusion
Background
Hypotheses
Empirical setting
Influence via unions
Source: www.igmetall-bmw.de
Chen Lin, Thomas Schmid, Yuhai Xuan
Employee representation and financial leverage
Theoretical framework
Empirical results
Conclusion
Background
Hypotheses
Empirical setting
Influence via employee representatives
Source: www.audi-mediacenter.com
Chen Lin, Thomas Schmid, Yuhai Xuan
Employee representation and financial leverage
Theoretical framework
Empirical results
Conclusion
Background
Hypotheses
Empirical setting
Interest alignment
Employees and banks
Both banks and employees are interested in the long-term survival
and stability of the firm to secure jobs and debt repayments
Fauver & Fuerst (2006) argue that “labor seats on the board should
enhance monitoring of managers [...] and reduce private blockholder
privileges in much the same way as bankers on corporate boards do”
Thus, labor representatives who aim to protect the interests of
employees may (unintentionally) also represent banks’ interests
Hypotheses
Interest alignment may enable firms to access bank debt more easily
and at better conditions → higher debt levels
Furthermore, firms with PER are expected to have lower firm risk →
less cash flow / equity volatility
Chen Lin, Thomas Schmid, Yuhai Xuan
Employee representation and financial leverage
Theoretical framework
Empirical results
Conclusion
Background
Hypotheses
Empirical setting
Dataset
Sample construction
Public and private German firms between 2005 and 2013
Firms with ≥ 1,000 ≤ 3,000 domestic employees are considered
This leads to about 160 sample firms with over 700 firm-years
Main data sources
Accounting data comes from Hoppenstedt (HS)
Number of domestic employees: HS and hand-collected
Additional data from Dealscan, SDC Platinum, and Datastream
Main variables
per equals one if the firm has parity employee representation
leverage is defined as
total debt
total debt + book value of equity
Chen Lin, Thomas Schmid, Yuhai Xuan
Employee representation and financial leverage
Theoretical framework
Empirical results
Conclusion
Background
Hypotheses
Empirical setting
Empirical strategy
Identification strategy
We exploit that PER is regulated by law and not a voluntary
decision of firms
(
1 if DEi,t > 2000
German law mandates that: PERi,t =
0 if DEi,t ≤ 2000
Regression discontinuity design
We use a parametric strategy and limit the sample to firms with
around 2,000 DE (i.e., 1,000 to 3,000 DE)
The empirical model is:
→
Levi,t = α + βPERi,t−1 + ν X i,t−1 +
4
P
p=1
γp Api,t−1 +
4
P
p=1
δp Api,t−1 T0|1 + i,t
Ai,t = DEi,t − 2000
This approach controls for any direct impact of domestic employees
on leverage (on both sides of the threshold)
Chen Lin, Thomas Schmid, Yuhai Xuan
Employee representation and financial leverage
Theoretical framework
Empirical results
Conclusion
Main results
Robustness
Further tests
Content
1
Theoretical framework
Background
Hypotheses
Empirical setting
2
Empirical results
Main results
Robustness
Further tests
3
Conclusion
Chen Lin, Thomas Schmid, Yuhai Xuan
Employee representation and financial leverage
Theoretical framework
Empirical results
Conclusion
Main results
Robustness
Further tests
Plot
Chen Lin, Thomas Schmid, Yuhai Xuan
Employee representation and financial leverage
Theoretical framework
Empirical results
Conclusion
Main results
Robustness
Further tests
Leverage & parity employee representation
Model
I
II
III
IV
V
PER
0.068**
(2.16)
0.12***
(3.09)
0.11***
(2.91)
0.14***
(3.20)
0.15***
(3.22)
Size
-0.0038
(-0.17)
-0.11
(-0.96)
-1.05***
(-6.27)
-0.023
(-0.80)
0.028
(0.67)
-0.092**
(-2.21)
-0.0015
(-0.067)
-0.094
(-0.85)
-1.05***
(-6.21)
-0.014
(-0.55)
0.033
(0.79)
-0.096**
(-2.33)
-0.0022
(-0.098)
-0.082
(-0.73)
-1.06***
(-6.27)
-0.019
(-0.69)
0.035
(0.85)
-0.10**
(-2.46)
-0.0034
(-0.15)
-0.073
(-0.67)
-1.05***
(-6.24)
-0.012
(-0.43)
0.033
(0.81)
-0.098**
(-2.40)
-0.0030
(-0.13)
-0.071
(-0.65)
-1.04***
(-6.17)
-0.015
(-0.49)
0.031
(0.73)
-0.096**
(-2.31)
725
158
0.33
yes
yes
no
no
725
158
0.34
yes
yes
one
no
725
158
0.34
yes
yes
two
no
725
158
0.35
yes
yes
two
yes
725
158
0.36
yes
yes
four
yes
Tangibility
ROA
TobQind
Listing
Acc. Std.
Observations
Firms
R2
Industry FE
Year FE
Polynomial
/ either side
Chen Lin, Thomas Schmid, Yuhai Xuan
Employee representation and financial leverage
Theoretical framework
Empirical results
Conclusion
Main results
Robustness
Further tests
Identification threats
Chen Lin, Thomas Schmid, Yuhai Xuan
Employee representation and financial leverage
Theoretical framework
Empirical results
Conclusion
Main results
Robustness
Further tests
Identification threats cont.
Chen Lin, Thomas Schmid, Yuhai Xuan
Employee representation and financial leverage
Theoretical framework
Empirical results
Conclusion
Main results
Robustness
Further tests
Identification threats cont.
Is there evidence for large-scale manipulation?
The law exists since 1976 without fundamental changes
In 2005, a Government Commission (Biedenkopf Commission) was
set up to review the law
Some quotes from the final report:
“[t]he academic members stated that they saw no reason to propose
a fundamental revision of the German system of board-level
representation”
“the protection for employee interests provided by the existing
regulations remains appropriate”
“only very few cases of companies avoiding boardlevel representation
are known”
Chen Lin, Thomas Schmid, Yuhai Xuan
Employee representation and financial leverage
Theoretical framework
Empirical results
Conclusion
Main results
Robustness
Further tests
Identification threats cont.
Model
PER
I
law deviations
IIa
IIb
placebo test
0.20**
(2.09)
DE1,500
-0.0036
(-0.093)
DE2,500
0.037
(0.71)
TE2,000
Size
Tangibility
ROA
TobQind
Listing
Acc. Std.
Observations
Firms
R2
Industry FE
Year FE
Polynomial
/ either side
III
-0.051
(-1.03)
-0.011
(-0.47)
0.0018
(0.017)
-1.11***
(-6.53)
0.024
(0.74)
0.032
(0.76)
-0.097**
(-2.30)
-0.0011
(-0.055)
-0.20*
(-1.94)
-0.88***
(-7.16)
0.027
(0.75)
-0.013
(-0.34)
-0.099**
(-2.57)
0.013
(0.51)
-0.15
(-1.15)
-0.89***
(-5.30)
-0.092**
(-2.32)
0.029
(0.75)
-0.090**
(-2.21)
-0.0020
(-0.078)
0.034
(0.32)
-0.88***
(-6.14)
0.036
(0.68)
-0.035
(-0.98)
-0.044
(-1.17)
679
152
0.36
yes
yes
four
yes
934
187
0.32
yes
yes
four
no
557
142
0.32
yes
yes
four
no
653
155
0.33
yes
yes
four
no
Chen Lin, Thomas Schmid, Yuhai Xuan
Employee representation and financial leverage
Theoretical framework
Empirical results
Conclusion
Main results
Robustness
Further tests
Interest alignment
Idea
Alignment of interests between employees and banks may provide an intuitive
explanation for higher leverage
Test 1: bank ownership
Equity stakes are a substitute for banks to affect firm policy directly; thus,
PER should be less relevant if banks hold equity stakes
Bank equity holdings in industrial firms have been (and still are) popular
However, bank ownership is likely endogenously determined → use the
2001 capital gains tax reform which increased incentives for German banks
to sell their equity stakes (i.e., banks could sell equity stakes without
paying capital gain taxes)
We construct a second sample around this event (only listed firms)
Chen Lin, Thomas Schmid, Yuhai Xuan
Employee representation and financial leverage
Theoretical framework
Empirical results
Conclusion
Main results
Robustness
Further tests
Bank ownership & tax reform
Model
Ia
PERpre
0.11
(1.00)
0.17*
(1.84)
PERpre x post
Ib
0.18**
(2.44)
Ic
0.35***
(4.40)
Bankpre
PER x bankpre
Post x bankpre
PERpre x post x bankpre
Size
Tangibility
ROA
TobQ
Acc. std.
Observations
Firms
R2
Industry FE
Year FE
Firm FE
Polynomial
/ either side
Polynomial x post
IIa
IIb
-0.088*
(-1.94)
0.041
(1.00)
0.13*
(1.72)
-0.089
(-0.99)
-0.18**
(-2.38)
0.21**
(2.39)
-0.12*
(-1.76)
0.20**
(2.44)
0.0044
(0.12)
0.033
(0.70)
-0.011
(-0.055)
-0.56*
(-1.94)
-0.097*
(-1.74)
-0.029
(-0.42)
-0.066
(-0.66)
0.033
(0.079)
0.014
(0.080)
0.0027
(0.076)
0.032
(0.57)
-0.11
(-1.51)
0.22
(0.92)
0.23*
(1.69)
-0.014
(-0.43)
0.042
(0.91)
0.032***
(3.34)
0.28***
(3.63)
-0.13
(-1.27)
-0.073***
(-5.24)
0.0071
(0.24)
0.072***
(2.74)
0.37***
(3.54)
-0.21***
(-3.43)
0.0039
(0.20)
0.010
(0.37)
160
57
0.32
yes
yes
no
four
yes
no
160
57
0.21
yes
yes
yes
four
yes
no
160
57
0.51
yes
yes
yes
four
yes
yes
1,103
264
0.23
yes
yes
no
no
no
no
1,103
264
0.13
yes
yes
yes
no
no
no
Chen Lin, Thomas Schmid, Yuhai Xuan
Employee representation and financial leverage
Theoretical framework
Empirical results
Conclusion
Main results
Robustness
Further tests
Interest alignment cont.
Test 2: loan characteristics
Based on data from Dealscan, we analyze interest rate and other loan
characteristics
We expect more favorable financing conditions for firms with PER
Test 3: cash flow sensitivity of cash
We expect less financial constraints for firms with PER
As empirical proxy for financial constraints we apply the cash flow
sensitivity of cash (Almeida et al. 2004)
We find that the cash flow sensitivity of cash is lower in firms with PER
Chen Lin, Thomas Schmid, Yuhai Xuan
Employee representation and financial leverage
Theoretical framework
Empirical results
Conclusion
Main results
Robustness
Further tests
Interest rate
Model
I
IIa
IIb
III
PER
-0.017***
(-5.67)
-0.013***
(-3.09)
-0.011*
(-1.82)
-0.018***
(-3.89)
Leverage
-0.0023
(-0.49)
-0.0019**
(-2.21)
0.015**
(2.18)
-0.026*
(-1.87)
-0.0013
(-0.55)
0.0026
(1.64)
-0.0017
(-1.08)
0.010***
(9.35)
0.0051
(1.07)
-0.0053***
(-4.61)
0.00043
(0.078)
-0.018*
(-1.86)
0.00075
(0.31)
-0.00032
(-0.18)
-0.0012
(-0.72)
0.019**
(2.50)
-0.0028*
(-1.97)
0.0038
(0.40)
-0.0071
(-0.29)
-0.020***
(-2.97)
0.00089
(0.35)
-0.0033
(-1.20)
0.0099*
(1.73)
-0.0029**
(-2.58)
0.036***
(3.00)
-0.050**
(-2.54)
0.0066
(1.38)
0.0027
(1.29)
-0.0031*
(-1.71)
253
61
0.64
no
no
four
yes
253
61
0.63
no
yes
four
yes
253
61
0.53
yes
no
four
yes
253
61
0.68
yes
yes
four
yes
Size
Tangibility
ROA
TobQind
Listing
Z-score class
Ind/year mean
Observations
Firms
R2
Industry FE
Year FE
Polynomial
/ either side
Chen Lin, Thomas Schmid, Yuhai Xuan
Employee representation and financial leverage
Theoretical framework
Empirical results
Conclusion
Main results
Robustness
Further tests
Deal characteristics
lenders
covenants
PER
0.22**
(2.60)
maturity
0.20**
(2.46)
-0.34*
(-1.84)
-3.10**
(-2.15)
Leverage
0.077
(0.43)
0.071*
(1.80)
0.28*
(1.75)
0.90**
(2.01)
-0.0061
(-0.048)
-0.10*
(-1.94)
-0.041
(-0.81)
-0.046
(-0.29)
0.070**
(2.12)
0.18
(1.29)
0.74*
(1.89)
0.057
(0.43)
-0.097**
(-2.14)
-0.026
(-0.57)
0.73***
(2.75)
0.028
(0.30)
-0.52
(-1.08)
0.51
(0.65)
0.61***
(2.75)
-0.075
(-0.61)
0.22
(1.64)
1.15
(0.35)
0.17
(0.28)
5.32
(1.57)
4.18
(0.62)
-1.36
(-0.60)
3.09***
(2.77)
-2.11***
(-2.64)
735
133
yes
yes
four
yes
OLS
735
133
yes
yes
four
yes
Poisson
763
134
yes
yes
four
yes
Poisson
763
134
yes
yes
four
yes
Poisson
Listing
Size
Tangibility
ROA
TobQind
Z-score class
Observations
Firms
Industry FE
Year FE
Polynomial
/ either side
Model
Chen Lin, Thomas Schmid, Yuhai Xuan
Employee representation and financial leverage
Theoretical framework
Empirical results
Conclusion
Main results
Robustness
Further tests
Cash flow sensitivity of cash
Model
Sample
Ia
PER
Ib
no PER
IIa
all
IIb
CF≥0
IIa
-0.023
(-0.30)
0.098***
(2.88)
0.015
(1.33)
0.10***
(2.91)
-0.12*
(-1.83)
0.024**
(2.27)
0.12***
(4.40)
-0.19***
(-2.85)
0.019*
(1.90)
0.064*
(1.91)
-0.13**
(-2.11)
0.027**
(2.37)
0.21
(1.46)
-0.24**
(-2.08)
0.0021
(0.44)
0.0023
(0.13)
0.0010
(0.38)
0.0034
(0.24)
0.0013
(0.62)
0.0040
(0.39)
-0.00048
(-0.25)
0.0011
(0.11)
0.0015
(0.64)
0.015*
(1.74)
-0.17*
(-1.82)
0.17***
(4.74)
-0.0015
(-0.048)
-0.00066
(-0.12)
0.0015
(0.60)
0.014
(1.59)
-0.16*
(-1.88)
0.17***
(4.74)
-0.0072
(-0.25)
-0.00044
(-0.079)
154
44
0.11
yes
yes
four
yes
no
436
106
0.084
yes
yes
four
yes
no
590
146
0.057
yes
yes
four
yes
no
567
144
0.056
yes
yes
four
yes
no
590
146
0.17
yes
yes
four
yes
no
590
146
0.19
yes
yes
four
yes
yes
PER
Cash flow
PER x cash flow
Size
Growth−1y ,+1y
∆ Short debt
∆ NWC
Capex
M&A deal
Observations
Firms
R2
Industry FE
Year FE
Polynomial
/ either side
Poly. x cash flow
Chen Lin, Thomas Schmid, Yuhai Xuan
IIb
all
Employee representation and financial leverage
Theoretical framework
Empirical results
Conclusion
Main results
Robustness
Further tests
Channel for interest alignment
Lower firm risk
Risk averse employees may have strong incentives to reduce firm risk due
to their firm-specific human capital (Gorton & Schmid 2000)
This may provide an intuitive explanation for interest alignment between
employees and banks
Empirical findings I: M&A
Firms with PER have lower probabilty for M&A deals (and fewer deals)
If they engage in M&A deals, capital market response is more favorable
Empirical findings II: stability & firm risk
The standard deviation of cash flows and ROA is lower in firms with PER
We also find evidence for lower idiosyncratic (and total) firm risk based on
stock returns
Chen Lin, Thomas Schmid, Yuhai Xuan
Employee representation and financial leverage
Theoretical framework
Empirical results
Conclusion
Main results
Robustness
Further tests
M&A deals
M&A deals
CAR−1,+1
dummy
# deals
CER−1,+1
CAR−2,+2
PER
-0.78***
(-3.00)
-0.84***
(-2.58)
4.16**
(2.45)
4.99***
(3.01)
3.98**
(2.54)
Leverage
-0.18
(-0.46)
0.56***
(4.76)
-0.37
(-0.65)
0.98
(0.90)
0.22
(0.52)
0.42**
(2.40)
-0.0023
(-0.0044)
0.79***
(6.42)
-1.12
(-1.48)
0.24
(0.17)
0.19
(0.31)
0.85***
(3.17)
2.93
(0.81)
-1.18
(-0.91)
-4.46
(-1.53)
-34.9**
(-2.59)
5.43
(1.47)
-2.07
(-1.41)
-4.78
(-1.53)
-32.4**
(-2.51)
0.60
(0.12)
-2.39*
(-2.04)
-4.05*
(-1.76)
-33.4
(-1.65)
0.85
(0.60)
-0.84
(-0.95)
-0.048***
(-3.19)
-1.21**
(-2.15)
1.50*
(1.70)
0.95
(0.70)
-0.22
(-0.21)
-0.046*** -0.015
(-4.02)
-1.33**
(-2.22)
1.53*
(1.93)
0.82
(0.38)
0.10
(0.11)
(-0.86)
-0.83
(-0.86)
1.69
(1.30)
182
yes
yes
four
yes
OLS
182
yes
yes
four
yes
OLS
182
yes
yes
four
yes
OLS
Size
Tangibility
ROA
TobQind
Listing
TobQ
Market cap.
Free float
Diversifying deal
International deal
Observations
Industry FE
Year FE
Polynomial
/ either side
Model
688
yes
yes
four
yes
Probit
692
yes
yes
four
yes
Poisson
Chen Lin, Thomas Schmid, Yuhai Xuan
Employee representation and financial leverage
Theoretical framework
Empirical results
Conclusion
Main results
Robustness
Further tests
Firm risk
Model
Variable
I
σidio
II
log (σidio )
III
σtotal
PER
-6.94**
(-2.47)
-0.15**
(-2.01)
-0.88**
(-2.11)
Leverage
6.57
(0.98)
7.08**
(2.18)
0.74
(0.099)
-57.1***
(-2.98)
8.25***
(4.71)
-6.79***
(-2.84)
0.014
(0.50)
0.13
(0.86)
0.18**
(2.18)
0.011
(0.050)
-1.03***
(-3.25)
0.17***
(3.27)
-0.18***
(-3.00)
3.4e-06
(0.0042)
0.93
(0.91)
1.32**
(2.46)
-0.014
(-0.011)
-9.93***
(-3.11)
1.73***
(5.47)
-1.11***
(-2.79)
0.0097*
(1.87)
258
58
0.66
yes
yes
four
yes
258
58
0.64
yes
yes
four
yes
258
58
0.70
yes
yes
four
yes
Size
Tangibility
ROA
TobQ
Market cap.
Free float
Observations
Firms
R2
Industry FE
Year FE
Polynomial
/ either side
Chen Lin, Thomas Schmid, Yuhai Xuan
Employee representation and financial leverage
Theoretical framework
Empirical results
Conclusion
Main results
Robustness
Further tests
Stability
Model
Variable
Period
Ib
SD(cash flow)
4y
Ic
IIa
5y
3y
IIb
SD(ROA)
4y
IIc
3y
PER
-0.030**
(-2.06)
-0.028*
(-1.96)
-0.038**
(-2.26)
-0.031
(-1.57)
-0.032*
(-1.85)
-0.048*
(-1.91)
Leverage
-0.013
(-0.76)
0.0073**
(1.99)
0.029*
(1.67)
-0.018
(-0.41)
-0.0043
(-0.32)
0.032
(0.97)
-0.013*
(-1.88)
0.014*
(1.79)
-0.021
(-1.02)
0.0066
(1.65)
0.053**
(2.10)
-0.022
(-0.29)
0.0060
(0.29)
0.037
(1.10)
-0.013
(-1.45)
0.015
(1.59)
-0.018
(-0.84)
0.0083
(1.65)
0.052
(1.44)
0.052
(0.58)
0.0025
(0.11)
0.026
(1.06)
-0.011
(-1.06)
0.011
(1.00)
-0.013
(-0.76)
0.013***
(2.69)
0.030
(1.23)
-0.077
(-0.88)
-0.0031
(-0.20)
0.019
(0.68)
-0.0070
(-0.67)
0.012
(1.19)
-0.021
(-1.01)
0.013**
(2.32)
0.044
(1.46)
-0.051
(-0.58)
0.00012
(0.0056)
0.031
(1.02)
-0.0073
(-0.55)
0.012
(1.04)
-0.017
(-0.66)
0.016**
(2.14)
0.062
(1.33)
0.023
(0.22)
0.0030
(0.12)
0.022
(0.83)
0.0014
(0.088)
0.0014
(0.11)
344
97
0.40
yes
yes
four
yes
256
90
0.44
yes
yes
four
yes
170
63
0.57
yes
yes
four
yes
347
98
0.41
yes
yes
four
yes
258
91
0.45
yes
yes
four
yes
171
64
0.54
yes
yes
four
yes
Size
Tangibility
ROA
TobQind
Growth−1y ,+1y
Listing
Acc. Std.
Observations
Firms
R2
Industry FE
Year FE
Polynomial
/ either side
Ia
Chen Lin, Thomas Schmid, Yuhai Xuan
5y
Employee representation and financial leverage
Theoretical framework
Empirical results
Conclusion
Content
1
Theoretical framework
Background
Hypotheses
Empirical setting
2
Empirical results
Main results
Robustness
Further tests
3
Conclusion
Chen Lin, Thomas Schmid, Yuhai Xuan
Employee representation and financial leverage
Theoretical framework
Empirical results
Conclusion
Summary
We analyze how employee codetermination affects financial leverage
The German environment allows us to investigate a direct impact of
employees (which complements prior evidence on indirect influence)
The supervisory board of German firms has to consist of 50%
employee representatives if the firm has > 2,000 domestic employees
→ regression discontinuity design
We find that parity employee representation increases leverage
Different tests point to a supply side effect: as banks interests are
similar to those of employees, employee power reduces agency
conflicts with debt providers
Further tests reveal lower firm risk as possible channel for this
alignment
“Bright” side of employee representation
Chen Lin, Thomas Schmid, Yuhai Xuan
Employee representation and financial leverage
Theoretical framework
Empirical results
Conclusion
End
For questions, please contact me: schmid@hku.hk
Chen Lin, Thomas Schmid, Yuhai Xuan
Employee representation and financial leverage
Backup
References
Backup
Chen Lin, Thomas Schmid, Yuhai Xuan
Employee representation and financial leverage
Backup
References
Literature
German co-determination
Several papers analyze the impact of the German co-determination
The empirical evidence on valuation and firm performance is rather
inconclusive (e.g., Gorton & Schmid 2004, Fauver & Fuerst 2006)
Kraft et al. (2011) finds no impact on innovation, whereas Kim
et al. (2015) find that employee representation protects skilled
workers against layoffs during industry shocks
Chen Lin, Thomas Schmid, Yuhai Xuan
Employee representation and financial leverage
Backup
References
Variables I
Main variables
PER
DE
Leverage
Dummy which equals one if the firm has parity employee representation. Source: hand-collected.
Number of domestic employees. Source: Hoppenstedt and hand-collected.
Total debt divided by total debt plus book value of equity. Total debt includes current and long-term
liabilities and excludes provisions and accruals. Source: Hoppenstedt (HS).
Control variables
Listing
Size
Tangibility
ROA
TobQ
TobQind
Acc. Std.
Z-Score
Z-Score class
Dummy that equals one if preferred or voting shares of the firm are listed on any EU-regulated or
exchange-regulated market in Germany. Source: hand-collected.
Natural logarithm of total assets in Mio e . Source: HS.
Long-term tangible assets scaled by total assets. Source: HS.
Earnings before interest and taxes, scaled by total assets. Source: HS.
Market value of equity plus total liabilities divided by the sum of book value of equity and total liabilities
( wc08001+wc03351 ). Source: WC.
wc03501+wc03351
Mean of TobQ in an industry (based on the 17 industries classification) and year. Source: Own calculation.
Dummy which equals one if a firm applies international accounting standards. Source: HS.
Z-Score is calculated as 0.717*x1 + 0.847*x2 + 3.107*x3 + 0.420*x4 + 0.998*x5 with x1
retained earnings
EBIT
= short-term assets−short-term liabilities ; x2 =
; x3 =
; x4 =
total assets
total assets
total assets
total equity
sales
; x5 =
; Source: own calculation based on HS.
total liabilities
total assets
Equals minus one if Z-Score is above 2.9, one if Z-Score is below 1.22, and zero if Z-Score is between
1.22 and 2.9. Source: own calculation.
Dealscan variables (source: Dealscan)
Spread
Maturity
Lenders
Covenants
Amount
Purpose
Spread all-in-drawn.
Ln of deal maturity in months.
Ln of number of lenders. If Dealscan reports no information on lender shares, we assume that only one
lender exists.
Number of covenants for the deal. If no information on covenants is availabe, we set the variable to zero.
Ln of the facility amount.
Dummy which equals one if primary purpose is “corporate purpose”.
HS stands for Hoppenstedt, DS for Dealscan, and WC for Worldscope.
Chen Lin, Thomas Schmid, Yuhai Xuan
Employee representation and financial leverage
Backup
References
Variables II
Tax event
Post
ERpre−ref
Bankpre−ref
Dummy for post tax reform period. Equals one for years 2002 to 2004.
ER as of 1998. Source: hand-collected.
Dummy which equals one if a German bank owns voting rights in any year between 1996 and 1998.
Source: HS.
M&A deals (source: SDC Platinum)
M&A deal
# deals
CAR
CER
Diversifying deal
International deal
Dummy which equals one if a firm conducts a M&A deal.
Number of M&A deals.
Cumulative abnormal return around the announcement of a M&A deal. Normal returns are estimated
with a market model; the CDAX is used as market index. The estimation period is 200 trading days
ending two months before the announcement date (Cai & Sevilir 2012). Events for which we have less 150
observations during the estimation period are not considered. The CAR is measured during a symmetric
three or five day window around the event.
Cumulative excess return. Excess return is defined as return above the market index, i.e., the CDAX.
Dummy which equals one if the firm acquires a target outside its main business segment (as indicted by
the SDC macro industry).
Dummy which equals one if the target is located outside Germany.
Stability & risk
SD(cash flow)
SD(ROA)
σidio
σtotal
Standard deviation of cash flow over the specific time period. Source: HS.
Standard deviation of ROA over the specified time period. Source: HS.
Yearly measure for idiosyncratic risk (Panousi & Papanikolaou 2012). Calculated as volatility of weekly
residuals. Residuals are obtained from a regression of firm’s equity returns on the market return (CDAX).
r
P 2
i,t
σidio for firm i in year t is then calculated as σ
=
; with i,τ being the residual from
i,τ
idio
the first regression in week τ . Equity returns are calculated based changes of the Datastream item RI
(return index) between week t-1 and t. Some adjustments are made for equity returns (i.e., deletion of
all observations with unadjusted price below one and observations where the same price is reported for
at least three consecutive weeks)
Yearly standard deviation of weekly equity returns. The same adjustments as above are conducted.
Chen Lin, Thomas Schmid, Yuhai Xuan
Employee representation and financial leverage
Backup
References
Variables III
Worldscope database
Leverage
Market leverage
Size
Tangibility
ROA
Total debt [wc03255] / (total debt + book value of equity [wc03501]).
Total debt [wc03255] / (total debt + market value of equity [wc08001]).
Ln of total assets [wc02999] in thousand e .
Property, plant, and equipment [wc02501] / total assets.
EBIT [wc18191] / total assets.
Other variables
Cash flow
Cash
Growth−1y ,+1y
∆ Delta short debt
Capex
∆ NWC
Free float
Market cap.
Sales minus total expenses plus depreciation divided by total assets. Source: HS.
Cash and liquid assets divided by total assets. Source: HS.
salest+1
Sales growth between year t+1 and year t-1. Calculated as
− 1. Source: HS.
salest−1
Difference in trade liabilities between t-1 and t, divided by total assets. Source: HS.
Additions to fixed assets in year t divided by total assets at the end of year t-1. Source: HS.
Difference in working capital, scaled by total assets. Source: HS.
Fraction of shares in free float. Source: DS.
Natural logarithm of one plus market capitalization in Mio e . Source: DS.
Chen Lin, Thomas Schmid, Yuhai Xuan
Employee representation and financial leverage
Backup
References
Descriptive statistics
Variable
PER
DE
Leverage
Listing
Size (mio Eur)
Tangibility
ROA
TobQind
Acc. Std.
N
Mean
SD
p25
p50
p75
min
max
768
797
797
791
797
797
797
797
797
0.25
1785.27
0.53
0.40
740.25
0.30
0.08
1.30
0.53
0.44
518.38
0.19
0.49
1042.76
0.17
0.08
0.30
0.50
0
1394
0.4
0
272
0.19
0.04
1.11
0
0
1662
0.56
0
452
0.27
0.08
1.24
1
1
2127
0.65
1
765
0.38
0.12
1.43
1
0
1000
0.04
0
43.2
0.02
-0.5
0.93
0
1
2998
1
1
8794
0.94
0.62
3.94
1
Chen Lin, Thomas Schmid, Yuhai Xuan
Employee representation and financial leverage
Backup
References
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108(2), 449–470.
URL: http://www.sciencedirect.com/science/article/pii/S0304405X12002413
Almeida, H., Campello, M. & Weisbach, M. S. (2004), ‘The cash flow sensitivity of cash’, Journal of Finance 59(4), 1777–1804.
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Bronars, S. G. & Deere, D. R. (1991), ‘The threat of unionization, the use of debt, and the preservation of shareholder wealth’, Quarterly
Journal of Economics 106(1), 231–254.
URL: http://www.jstor.org/stable/2937914
Cai, Y. & Sevilir, M. (2012), ‘Board connections and M&A transactions’, Journal of Financial Economics 103(2), 327–349.
URL: http://www.sciencedirect.com/science/article/pii/S0304405X11002170
Fauver, L. & Fuerst, M. E. (2006), ‘Does good corporate governance include employee representation? Evidence from German corporate
boards’, Journal of Financial Economics 82(3), 673–710.
Gorton, G. & Schmid, F. A. (2000), ‘Universal banking and the performance of german firms’, Journal of Financial Economics
58(1), 29–80.
URL: http://www.sciencedirect.com/science/article/pii/S0304405X00000660
Gorton, G. & Schmid, F. A. (2004), ‘Capital, labor, and the firm: A study of German codetermination’, Journal of the European Economic
Association 2(5), 863–905.
Kim, E. H., Maug, E. & Schneider, C. (2015), Labor representation in governance as an insurance mechanism.
Kraft, K., Stank, J. & Dewenter, R. (2011), ‘Co-determination and innovation’, Cambridge Journal of Economics 35(1), 145–172.
URL: http://cje.oxfordjournals.org/content/35/1/145.short
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URL: http://onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.2010.01565.x/full
Panousi, V. & Papanikolaou, D. (2012), ‘Investment, idiosyncratic risk, and ownership’, Journal of Finance 67(3), 1113–1148.
URL: http://onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.2012.01743.x/full
Perotti, E. C. & Spier, K. E. (1993), ‘Capital structure as a bargaining tool: The role of leverage in contract renegotiation’, American
Economic Review 83(5), 1131–1141.
URL: http://www.jstor.org/stable/2117552
Simintzi, E., Vig, V. & Volpin, P. (2014), ‘Labor protection and leverage’, Review of Financial Studies, forthcoming .
Chen Lin, Thomas Schmid, Yuhai Xuan
Employee representation and financial leverage