Shareholder Rights and Employment

Abstract

In this paper I hypothesize and find that both shareholder rights and debt have significant effects on firm-employee relationships. I find that, consistent with ineffective resource management, firms with weaker governance have more employees per assets and are more likely to hire due to sales growth. I use changes in investment in capital and R&D to rule out that this result is due entirely to the propensity of poorly governed firms to overinvest. Furthermore, this study shows that while weak shareholder rights are associated with lower labor productivity, higher debt is also associated with lower labor productivity. Finally, I show that higher labor productivity is associated with higher wages, and that firms with weak shareholder rights pay more for this productivity. These results are consistent with the theory that debt discipline and shareholder monitoring, although both forms of corporate governance, are subject to the differing incentives of debt and equity investors.