Agency costs of stakeholders

and capital structure:

international evidence
Bing Yu
School of Business, Meredith College, Raleigh, North Carolina, USA
Abstract
Purpose This paper examines the relationship between bargaining powers of creditors as well as
employees and nancial leverage across countries. The purpose of this paper is to explore roles of
creditors and employees in capital structure decisions under different legal and political regimes
across countries.
Design/methodology/approach Using country-level creditor rights index and labor rights index
as a proxy for bargaining powers of creditors and employees, respectively, the author addresses the
interaction between creditors as well as employees and shareholders. The paper tests the impact of
employee rights and creditor rights on capital structure across countries.
Findings The author nds a positive relationship between employee rights and rms use of debt
and a negative relationship between creditor rights and rm debt ratio.
Social implications The paper provides a new perspective to interpret international variation in
nancial leverage in the world. The results obtained from this paper help us to understand nancial
leverage in different countries with various corporate governance mechanisms.
Originality/value This paper takes all stakeholders into account when studying agency problems;
it explores the role of creditors and employees in nancing decision making under various corporate
governance patterns and political and legal systems across countries.
Keywords Corporate governance, Capital structure, Creditors, Employees, Agency problems,
Creditor rights, Labor rights
Paper type Research paper
I. Introduction
A growing interest has been given to the impact of non-nancial stakeholders such as
creditors and employees on corporate decisions in corporate nance literature. This
paper examines relationship between creditors as well as employees and nancial
leverage across countries. The purpose is to explore roles of creditors and employees in
capital structure decisions under different legal and political regimes across countries.
Shareholders, creditors, and employees have heterogeneous utility functions in
corporate context. Tirole (2001, 2006) asserts that corporations select optimal
investment and nancing decisions within the constraints of legal and political
environments to which they belong. Within a company, stakeholders bargain with each
other to maximize benets of themselves. The bargaining between stakeholders is ruled
and regulated by a countrys legal and political regime. While legal and political regimes
differ across countries, the bargaining powers of stakeholders are not identical in
different countries. Interaction between creditors and shareholders is mainly through
the negotiation in debt contracting. The bargaining power of creditors relies largely
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/0307-4358.htm
JEL classication G30, G32, G38, K3
Agency costs of
stakeholders
303
Managerial Finance
Vol. 38 No. 3, 2012
pp. 303-324
qEmerald Group Publishing Limited
0307-4358
DOI 10.1108/03074351211201433
on creditor rights (CR) provided by a countrys legal system. Employees, on the other
hand, do not have voting right nor bargaining power unless they form unions or get
protection from labor law. Existing literature suggests that shareholders, with the
constraints of legal regime in a country, will seek a mechanism within corporations to
weaken creditors and employees bargaining powers so as to maximize payoffs.
Financial leverage is a tool that shareholders can use to achieve this goal. Dronars and
Deere (1991) develop a model to describe the role of debt in limiting employees
bargaining power when they form unions, while Matsa (2010) nds that debt is
positively correlated with unionization rates at rm level for rms in the USA.
This paper focuses on cross-country comparison. Using country-level creditor right
and labor right indices as proxies for bargaining powers of creditors and employees,
I investigate the impacts of creditor and employee rights on capital structure across
countries. I argue that when employee rights are high, employees will have stronger
bargaining powers and shareholders are more likely to be exploited by employees.
If so, shareholders intend to use more debt obligation to remove free cash ows so as
to reduce amount of revenues employees can extract. When CR are high, creditors have
more negotiation power to obtain good terms in debt contracting. If shareholders
cannot get a favorable debt contract, they are likely to reduce the use of debt capital.
My study extends the literature by exploring country level factors inuences and by
taking creditors and employees roles into account when examining capital structure
decisions across countries. This paper is directly related to the capital structure
literature that makes cross-country comparisonof nancial leverage. Empirical research
on cross-country nancial leverage nds a large variation across countries[1]. Basically,
these studies merely document differences in capital structure in different countries or
country groups. They identify how rm-level determinants of capital structure such as
rm size, protability, market-to-book ratio, retained earnings, and growth
opportunities affect capital structure differently across countries and interpret
generally the empirical results based on agency problems or signaling theories,
without examining specically the impacts of creditors and employees on nancial
leverage across countries. Treating a rm as a nexus through which shareholders and
managers in the productive enterprise contract with each other, law and nance
approach represented by a series of papers by La Porta, Lopez-deoSilanes, Shleifer, and
Vishny (LLSV hereafter) examines the relationship between a countrys legal origin as
well as level of protection for investors and nance. La Porta et al. (1997, 1998) nd that
common law countries provide stronger protection for shareholders than civil law
countries do and suggest that stronger investor protection has positive impact of
nancial market development. Numerous studies apply this law and nance approach
and link country-level shareholder rights (SR) to corporate nance decisions (Rajan and
Zingales, 1995, Claessens and Laeven, 2003, Hail and Leuz, 2006 and Pinkowitz et al.,
2006). While prior research focuses on SR, this paper extends the literature by exploring
country-level creditors and employees roles in capital structure decisions across
countries.
Around the world, countries with different legal and political systems provide
different extent of supports for various stakeholders. Some countries are in favor of
shareholders or creditors whereas others are in favor of employees (Gourevitch
and Shinn, 2005, Roe, 2004). This variation in legal and political institutions shapes
the characteristics of bargaining powers of various stakeholders (Charny, 1999).
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Therefore, shareholders efforts to interact with creditors and employees are constrained
by a countrys institutional conditions. Since creditor and employees rights granted by
law and regulatory regime are exogenous, shareholders will seek reduction of
bargaining powers of creditors and employees within a corporation. Basically, when
shareholders use debt obligation to reduce free cash ows, employees are less likely to
obtain explicit or implicit benets ( Jensen, 1986; Dronars and Deere, 1991). In regard to
creditors, since stronger CR are in favor of creditors at expense of shareholders in debt
contracting, shareholders will choose to use less debt capital so as to mitigate the
bargaining power of creditors.
My paper is also related in general to several studies that test the stakeholder theory
of capital structure at rm level. Klasa et al. (2009) and Matsa (2010) analyze the
strategic use of debt nancing by rms in highly unionized industry areas in the USA
and nd that those rms use more debt to remove free cash so as to gain bargaining
advantages over employees and protect rms from exploit of unions. Myers and
Saretto (2009) nd that rms increase leverage in response to the possibility of union
strikes when bargaining power of unions is strong. Both Acharya et al. (2011) and Vig
(2011) nd that in countries with stronger CR rms have lower nancial leverage. They
assert that rms are reluctant to use debt when CR are strong because nancial
distress costs are too high under such a situation.
In line with the above studies, I argue that across countries, rms in countries with
stronger employee rights will use more debt while rms in countries with stronger CR
are likely to use less nancial leverage. Shareholders will use nancing strategy
differently to mitigate bargaining powers of creditors and employees, restricted by
extents of creditor and employee rights provided by a countrys legal regime. When a
rm has less free cash ows, employees are less likely to obtain extra benets from the
rm even the labor law and regulatory regime provide high employee right in that
country. When shareholders intend to use nancial leverage to break employees and
managers preference for overexpansion and excessive risk reduction, another
stakeholder, creditors, will get involved. Unlike employees whose human capital is tied
up in the rm and not well diversied, creditors can diversify their investment well.
Thus, within legal framework, creditors can protect themselves through debt
contracting. Depending on the creditor right provided by a countrys legal regime,
creditors can negotiate with shareholders in such terms as cost of borrowing, limitation
on dividends payment in some circumstances, and restriction on excess borrowing in
the presence of high debt ratio.
This study addresses the following research questions:
RQ1. What is the relationship between country-level employee rights and
corporations nancial leverage across countries?
RQ2. What is the relationship between CR and corporations nancial leverage
across countries?
While exploring the role of creditors and employees in nancing decision making under
various corporate governance patterns and political and legal systems across countries,
this paper provides a new perspective to interpret international variation in nancial
leverage in the world. The results obtained from this paper help us to understand
nancial leverage in different countries with various corporate governance mechanisms
and ll signicant gaps in the literature on capital structure.
Agency costs of
stakeholders
305
The rest of the paper is organized as follows. A conceptual framework is discussed
and testable hypotheses are developed in Section I. Section II describes data and
research methodologies. Section III discusses empirical results. Section IV concludes
the study.
II. Conceptual framework
While shareholders can reduce their investment risk via diversication, employees tie
their human capital to a corporation. This asymmetric risk reduction between
shareholders and employees induces different risk aversion levels of shareholders and
employees. The contradictory preferences and pursuits between shareholders and
employees induce employees to seek for protection for their interests and job security
through any available channels. The most direct way employees use to protect their
benets is labor contracting. However, contracting involves negotiation and bargain.
Unlike shareholders, employees have a lower bargaining power in contracting process
unless they form union to get collective bargaining power. A union can extract no more
than the present value of future net cash ows. Dronars and Deere (1991) state that
rms can use debt to limit the effect that a union has on shareholder wealth because
debt obligation requires rms to repay a portion of future revenues to creditors, and
hence limit the amount of cash that employees can extract through a unions strong
bargaining power, without driving the rm into bankruptcy.
Roe (2003) asserts that governments provide protection for employees through their
law regulation in such areas as union formation, the costs of ring employees, and the
difculties of ring employees. When employees obtain more benets resulting from
stronger employee protection provided by a countrys labor law and regulation,
shareholders suffer fromthe increased revenues extracted by employees due to stronger
employee right. Therefore, shareholders have incentives to use more debt to divert
future cash ows to themselves rather than to employees.
With stronger bargaining powers either through formation of labor unions or from a
countrys legal regime, employees and creditors will bargain with shareholders to
pursue their best payoff. Since employee and CRare granted by a countrys legal regime,
shareholders will choose to lessen employees and creditors bargaining powers through
rm-level decisions. Using nancial leverage is an effective way at rmlevel to mitigate
bargaining powers of creditors and employees.
Based on the above discussion, nancial leverage is regarded as a tool to limit
bargaining powers of creditors and employees. The extent of bargaining powers
depends on the level of employee protection, SR, and CR provided by a countrys legal
and regulatory regime. Thus, I explore the association between country-level employee
and CR and nancing via testing hypotheses. Using country-level labor right as a
proxy for employee protection (Botero et al., 2004) and creditor right as proxy for
creditor protection (LLSV, 2006), I hypothesize:
H1. The stronger the labor right, the more debt the company will use.
A legal and political system that provides strong employee protection will emphasize
employees and managers natural agenda and demeans shareholders nature agenda.
Strong employee protection makes it hard and costly to lay off employees. Therefore,
under such a system, the pressure on the rm for low risk, unprotable expansion
is high, and the pressure to avoid risky organizational change is substantial.
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However, shareholders would prefer to go slow in expanding the rm, because
expansion is harder to reverse later than it would be in a political environment that
provides weak employee protection. To avoid unprotable expansion and to eliminate
the possibility of raising employees salaries and benets, shareholders want to remove
free cash ows from the rm via using more interest-bearing debts. When a countrys
legal regime is in favor of employees, in order to weaken bargaining power of employees,
corporations will choose to use more debt:
H2. The stronger the creditor right, the less the debt the company will use.
Creditor caninuence a rms nancing decision through debt contracting. The stronger
the creditor right, the more negotiating power creditors have during contracting process.
High creditor right allows creditors more likely to obtain favorable contracting.
To reduce bargaining power of creditor, shareholders are likely to use less debt capital.
III. Data and methodologies
3.1 Data sources and sample selection
The primary data source for the paper is Compustat Global Vantage. All rm-level
nancial accounting variable data are obtained from Global Industrial le. Market
price data are collected from Compustat Global Issue le. Country currency exchange
rate data are from Compustat Global Currency File. Country-level data are collected
from various resources. Country-level variables are obtained from previous research in
each aspect, respectively. I obtained SR, CR, and (LR) data from Djankov et al. (2008),
Djankov and Shleifer (2007) and Botero et al. (2004), respectively. I collected macro
economic data including stock market capitalization, bond market capitalization,
banking segment, GDP growth rate, ination rate from IMF and World Bank annual
statistics. Government quality data are from Kaufmann et al. (2007). Table I lists data
and variable information.
The sample period is 1990-2008. I begin sample construction by matching
Compustat Global Industrial with Global Issue and Global Currency les.
Rajan and Zingales (1995) point out that in any studies that compare corporations
nancial data across countries, the differences in accounting practices cause samples
bias. They notice that not every country requires rms to report consolidated balance
sheets, and corporations with unconsolidated balance sheets appear to have
underestimated nancial leverage data than those with consolidated nancial
statements. To avoid this sample selection bias, I select rms with fully consolidated
accounting statements only (consol Fin Global Industrial le). Since rms involved in
major mergers (cstat AB in Global Industrial le) have special capital structure
(Aivazian et al., 2001), such rms are dropped. Following literature on capital structure
(Rajan and Zingales, 1995; Aivazian et al., 2001), I exclude nancial rms (6999 . SIC
code . 6000), and utility rms (4999 . SIC code . 4900). I also drop rms with
negative equity, negative sales revenue, missing value of total assets, and negative cash
ows.
I match rm-level data from Global Vantage with country-level data from various
resources and require main three country-level explanatory variables, SR, CR, and labor
rights (LR) indices, be available to each country included in our sample. To comply with
the requirements of time-series cross-sectional regression, I drop the following countries
with less than 30 rm-year observations, Ghana, Croatia, Jordan, Kenya, and Romania.
Agency costs of
stakeholders
307
After applying these lters, our sample contains 182,182 rm-year observations from
21,663 unique rms over 52 countries during the period of 1990-2008.
I use two country-level variables, CR and LR indices as proxies for the bargaining
powers of creditors and employees, respectively. The SR is used as a control variable.
LLSV (1998) develop a SR index. This SR index is widely used in literature (LLSV,
2000; Pinkowitz et al., 2006). Djankov et al. (2008) update La Porta et al. (1997) SR index
to make it more accurate. I use the updated anti-self-dealing index from Djankov et al.
(2008) as a proxy for SR.
Similar to SR index, Djankov and Shleifer (2007) use CR index to measure for
country-level protection for creditors. The CR index is an accumulation of four dummy
variables that check:
.
whether a country imposes restrictions, such as creditors consent or minimum
dividends to le for reorganization;
.
whether secured creditors are able to gain possession of their security once the
reorganization petition has been approved (no automatic stay);
.
secured creditors are ranked rst in the distribution of the proceeds that result
from the disposition of the assets of a bankrupt rm; and
Abbr. Measurement Source
Panel A: rm-level variables
Variable
Debt Debt ratio Long-term debt/total assets Global Industrial le
MTB Market-to-book ratio (BV of total assets-BV of
equity MV of equity)/total assets
Global Industrial and
Global Issue
Prot Protability EBITDA/total assets Global Industrial le
Cash Cash Cash balance/total assets Global Industrial le
Size Size Log of total assets in US dollars Global Industrial le
Tang Tangibility Tangible assets/total assets Global Industrial le
Panel B: country-level variables
Proxy for
SR Shareholder rights Anti-self-dealing index Djankov et al. (2008)
CR Creditor rights Creditor rights index Djankov and Shleifer
(2007)
LR Labor rights Labor union power index Botero et al. (2004)
Stock Market Stock market
development
Stock market capitalization/GDP World Bank report
GOV_QUAL Government quality Government quality index Kaufmann et al. (2007)
OWNER_CON Ownership structure Ownership concentration index LLSV (1998)
BDGDP Bond market
development
Private bond market capitalization/
GDP
World Bank report
GDPG Economic
development
Annual GDP growth rate World Bank report
Ination Ination Annual ination rate World Bank report
BKGDP Banking
development
Domestic bank deposits/GDP IMF Statistic report
COM Legal origin Dummy variable equals one for
common law origin countries and zero
otherwise
LLSV (1998)
Table I.
Data denitions,
measurements and
sources
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.
whether the debtor does not retain the administration of its property pending the
resolution of the reorganization.
Roe (2004) asserts that a marginal increase in benets of employees would be a
marginal decrease in shareholders value and that strong LR provided by legal and
political systems in fact hurt a rm value. Therefore, I use measures for LR as a proxy
for bargaining power of employees.
There is an extensive literature on the relationship between LR and law and
regulation of labor (Besley and Burgess, 2003; Heckman and Pages-Serra, 2000; Lazear,
1990). Those studies check the law and regulatory provisions on such aspects as the
difculty of ring employees, the costs of ring employees, and the easiness of hiring
employees and explore how employees benets are affected due to the differences in
those provisions. With regard to employees power to pursue maximum benets,
Botero et al. (2004) use the labor union power index as a proxy for LR. The labor union
power is an average of seven dummy variables which equal one:
(1) if employees have the rights to unionize;
(2) if employees have the rights to collective bargaining;
(3) if employees have the legal duty to bargain with unions;
(4) if collective contracts are extend to third parties bylaw;
(5) if the law allows closed shops;
(6) if workers or unions, or both, have a right to appoint members to the Boards of
Directors; and
(7) if workers councils are mandated by law.
3.2 Methodology and research design
Studies on nancial leverage based on the trade-off theory and the pecking order
theory use the partial adjustment model to explore the optimal debt ratio (Harris and
Raviv, 1990; Myers, 2001) whereas studies addressing agency problems use debt ratio
to regress on rm-level determinants (Myers and Majluf, 1984). Studies on
international capital structure test the different impact of rm-level factors and add
country-level variables as explanatory variables. Following Rajan and Zingales (1995)
and Aivazian et al., I use the following model to examine the impact of creditor and
employee rights on nancing decisions across countries:
Debt
t
a
1
a
2
MTB
t
a
3
Profit
t
a
4
CASH
t
a
5
Size
t
a
6
Tang
t
a
7
SR
a
8
CR a
9
LR 1
t
1
Debt
t
the long-term debt ratio, computed by long-term debt divided by
total assets for rm i at year t (rm subscription is suppressed in
equation (1)).
MTB
t
the market-to-book ratio, computed by the book value of total assets
minus the book value of equity plus the market value of equity all divided
by the book value of total assets for rm i at year t (rm subscription is
suppressed in equation (1)).
Agency costs of
stakeholders
309
Pro
t
computed by earnings before interest, taxes, depreciation, and
amortization (EBITDA) divided by total assets for rm i at year t (rm
subscription is suppressed in equation (1)).
Size
t
the log of total assets in US dollars for rm i at year t (rm subscription is
suppressed in equation (1)).
Tang
t
the tangibility computed by tangible assets divided by total assets for
rm i at year t (rm subscription is suppressed in equation (1)).
SR the SR index at country level.
CR the CR index at country level.
LR the LR index at country level.
Rajan and Zingales (1995) point out that to examine the agency problems associated
with debt, it is necessary to remove liabilities like accounts payable that is used for
transactions purpose rather than for nancing purpose. Therefore, long-term debt ratio
is a more reliable measure used to address agency problems. Following this logic, I use
long-term debt only as the dependent variable. Frank and Goyal (2005) argue that
theoretically, the book value of debt is a better measure of creditors liability in case of
bankruptcy than market value of debt and that market value of debt has measurement
problems due to the volatility of market price. Thus, the dependent variable, Debt, is
computed by book value of long-term debt divided by book value of total assets for
each rm i at year t.
As discussed in Section I, this is a research that focuses on the impact of
country-specic characteristics on nancing policy, I use two groups of independent
variables in empirical tests: rm-level variables and country-level variables. Two
country-level variables, the CR and LR indices are major explanatory variables to
address research objectives. Firm-level variables are used as control variables. The
rm-level variables are selected based on capital structure theories, following up the
literature on capital structure.
Based on the capital structure theories, empirical research tests the impacts of
various variables on nancial leverage and interprets test results using one or another
model. Chen and Zhao (2006) nd that market-to-book ratio and prot are two key
rm-level determinants of capital structure in various scenarios. Frank and Goyal (2005)
examine 39 factors relating to nancial leverage and divide those factors into two tiers
based on their reliability of relationships with leverage. The top-tier factors include rm
size, average leverage in an industry, risk, and market-to-book ratio. To study capital
structure in the international context, considering availability of data for cross-national
comparison, Rajan and Zingales (1995) limit their rm-level control variables to four
factors: tangibility of assets, the market-to-book ratio, rm size, and protability.
They argue that those are factors most consistently correlated with leverage in the
literature.
Consistent with Rajan and Zingales (1995) and Frank and Goyal (2005), I choose to
use the follow rm-level variables as control variables: market-to-book ratio, prot,
size, and tangibility. The market-to-book ratio (MTB) is widely used in literature
(Rajan and Zingales, 1995; Aivazian et al., 2001; Chen and Zhao, 2006) to measure for
growth opportunities. I use the book value of total assets minus the book value
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of equity plus the market value of equity all divided by the book value of total assets to
calculate the market-to-book ratio. Market value of equity is computed by stock price
multiplying number of shares outstanding. Stock price information is collected from
Global Issue le. All stock prices are currency exchange rate-adjusted. Prot is dened
as the ratio of EBITDA to total assets. Prot is a proxy for internal nance capacity as
the pecking order model suggests. Size is the log of total assets in US dollars.
Tangibility, Tang, is computed by tangible assets divided by total assets. Both size
and tangibility represent for corporations operating performance. Size is also used as a
proxy for growth.
IV. Empirical results
4.1 Summary statistics
I provide sample description and summary statistics in Tables II and III, respectively.
The sample mean of debt ratio is 12.5 percent and median is 12 percent. Norway has
the highest average debt ratio, 23.13 percent, whereas Morocco has the lowest debt
ratio, 5.31 percent over the sample period. As presented in the following section, the
regression analysis on rm determinants of debt shows that those rm-level variables
affect debt ratios across countries in a similar way, implying that it is country-specic
characteristics that cause variations in nancial leverage across countries.
Table IV presents variables that describe country characteristics. I divide sample
into two groups: common law and civil countries. Consistent with literature, common
law countries have better shareholder protection than civil law countries because SR
mean for common law and civil law countries is 0.736 and 0.377, respectively. The LR
mean for common law and civil law countries is 0.261 and 0.340, respectively,
indicating that higher employee rights in civil countries.
4.2 Firm-level determinants of nancial leverage
I start analysis by running regression using rm-level variables only. To address the
outliers issue, I winsorize all rm-level variables at 5 percent level[2]. I run the
xed-effect regression using panel data as follows (rm subscription suppressed):
Debt
t
a
1
a
2
MTB
t
a
3
Profit
t
a
4
CASH
t
a
5
Size
t
a
6
Tang
t
1
t
2
The variables are dened the same as in Section II. To test rm determinants of debt
ratio, one needs to adjust to industry effect either by subtracting industry mean
(Chui et al., 2002) or by using industry dummy variables. Here, instead, I run the
regressions using industry segment data and pooled sample. I run regression using
sub-samples, dividing sample groups based on industry segments rst (Frank and
Goyal, 2005). Then I run the pooled sample using industry x effect model. The
signicance of coefcients remains consistent, showing that the correlation between
debt ratio and rm-level factors is not driven by industry difference. Table V presents
the regression results.
As predicted by the agency costs model and the pecking order model, the empirical
results are consistent with the literature on international capital structure comparison
(Rajan and Zingales, 1995; Aivazian et al., 2001). There are conicting theoretical
predictions and mixed empirical ndings on the effect of size on leverage. Rajan and
Zingales (1995) point out that rm size is usually regarded as a proxy both for
information asymmetry and for the probability of bankruptcy. These two proxies
Agency costs of
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311
Country
No. of obs No. of obs No. of obs No. of obs No. of obs
Primary Manufacturing Advanced manufacturing Services Total
Argentina 5 99 74 37 215
Australia 3,108 1,068 1,061 3,239 8,476
Austria 95 219 269 201 784
Belgium 110 305 270 313 998
Brazil 37 433 426 257 1,153
Canada 1,924 1,170 1,059 3,297 7,450
Switzerland 36 437 938 634 2,045
Chile 43 293 155 271 762
China 241 1,679 2,387 1,790 6,097
Colombia 0 44 39 33 116
Czech Republic 12 24 16 40 92
Germany 176 1,182 2,281 2,367 6,006
Denmark 77 389 396 514 1,376
Egypt 0 16 22 10 48
Spain 186 387 327 424 1,324
Finland 39 308 470 379 1,196
France 324 1,352 1,783 2,766 6,225
UK 1,583 2,855 3,347 9,078 16,863
Greece 95 199 182 278 754
Hong Kong 57 272 367 800 1,496
Hungary 6 60 45 56 167
Indonesia 145 810 459 580 1,994
India 5 394 337 242 978
Ireland 118 168 104 300 690
Israel 6 100 93 130 329
Italy 141 509 754 568 1,972
Japan 2,332 6,054 11,238 14,899 34,523
Korea 91 509 762 452 1,814
Sri Lanka 0 9 0 31 40
Morocco 0 8 19 5 32
Mexico 91 229 151 316 787
Malaysia 825 1,834 2,005 2,259 6,923
The Netherlands 119 497 529 941 2,086
Norway 191 237 347 621 1,396
New Zealand 26 168 75 481 750
Pakistan 20 159 85 29 293
Panama 0 2 13 18 33
Peru 60 30 41 28 159
Philippines 212 247 152 381 992
Poland 45 84 92 67 288
Portugal 61 143 86 148 438
Russian Federation 28 40 21 50 139
Singapore 258 564 1,293 1,890 4,005
Slovak Republic 13 19 7 0 39
Sweden 174 408 824 1,067 2,473
Thailand 165 1,034 754 1,087 3,040
Turkey 11 89 155 79 334
Taiwan 185 967 3,499 907 5,558
USA 2,719 8,915 15,265 17,451 44,350
(continued)
Table II.
Sample description
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imply two inverse effects on leverage. However, coefcients of size are positively
signicant. The coefcients of market-to-book ratios are negatively signicant at
1 percent level in services industry segment and pooled sample. While the results in
table show that the rm-level determinants of capital structure across countries are
consistent, given the variations in capital structure around the world (Aggarwal, 1990;
Aivazian et al., 2001; Gaud et al., 2007), it is necessary to explore the impact of country
characteristics on capital structure across countries.
4.3 The impact of creditor and employee rights on nancing policy
Based on the conceptual framework and hypotheses developed in Section I, I turn to
explore the relationship between creditor and employee rights and corporations
nancing policy across countries. The analysis is implemented by running the pooled
sample ordinary least square (OLS) regression with year and industry xed effects.
Robust clustering standard errors are estimated to control for interdependence
across rms. Based on Campbell (1996) and LLSV (2000), I introduce seven industry
group dummies in cross-national regression to control for the industry effects[3]. The
reference group is the agriculture industry group.
The H1 in Section I predicts the positive sign for LR and the negative sign for CR.
Table VI presents the regression results.
The pooled sample xed effects regression generates positive LR coefcients,
statistically signicant at 1 percent level, and negative CR coefcients at 1 percent
signicant level. Model (1) tests the impacts of CR and LR on debt ratio only whereas
model (2) adds SR as an additional independent variable. The results are signicant
after controlling for rm-level factors, rm clustering effects, and the compounded
impacts of SR, CR, and employee rights[4].
To address the possible presence of heteroscedasticity and autocorrelation, I also
estimate the regression model with the Newey-West standard error. The results stay
statistically signicant.
To address the multicollinearity issue in OLS regression, I use variance ination
factor (VIF) and tolerance to diagnose multicollinearity problem. Wooldridge (2002)
denes the VIFs and tolerance as the following:
VIFb
i
1=1 2R
2
i
; and
Tolerance b
i
1=VIF 1 2R
2
i
where b
i
is the coefcients of model and R
i
2
is the unadjusted R
2
.
Country
No. of obs No. of obs No. of obs No. of obs No. of obs
Primary Manufacturing Advanced manufacturing Services Total
Venezuela 0 31 32 20 83
South Africa 332 241 228 1,168 1,969
Zimbabwe 7 7 0 18 32
Total 16,534 37,297 55,334 73,017 182,182
Notes: Primary industry: SIC: 0000-1999; manufacturing industry: SIC: 2000-2999; advanced
manufacturing industry: SIC: 3000-3999 services industry: SIC: 4000-9999 Table II.
Agency costs of
stakeholders
313
Country MTB Prot Size Tang Debt
Argentina 5.869 0.116 6.817 0.495 0.1279
Australia 1.725 0.013 4.249 0.375 0.1117
Austria 1.225 0.098 5.689 0.323 0.1172
Belgium 1.415 0.118 6.126 0.293 0.1465
Brazil 1.128 0.125 6.919 0.458 0.1288
Canada 1.696 0.079 5.552 0.465 0.1690
Switzerland 1.362 0.110 6.405 0.337 0.1551
Chile 1.257 0.112 5.983 0.506 0.1293
China 1.420 0.073 5.619 0.391 0.0680
Colombia 0.921 0.067 6.694 0.398 0.0769
Czech Republic 1.101 0.137 6.695 0.568 0.0794
Germany 1.417 0.105 5.731 0.256 0.0956
Denmark 1.399 0.104 5.567 0.327 0.1544
Egypt 1.948 0.184 6.168 0.489 0.1993
Spain 1.438 0.109 6.453 0.370 0.1224
Finland 1.339 0.119 6.081 0.321 0.1939
France 1.404 0.111 6.005 0.200 0.1294
UK 1.687 0.092 4.909 0.320 0.0984
Greece 1.747 0.133 5.669 0.363 0.1127
Hong Kong 1.229 0.063 5.808 0.335 0.0855
Hungary 1.266 0.120 5.538 0.454 0.0869
Indonesia 1.291 0.128 4.634 0.415 0.1570
India 1.891 0.147 5.516 0.337 0.1895
Ireland 1.720 0.083 5.117 0.348 0.1518
Israel 2.059 0.095 5.801 0.240 0.1159
Italy 1.194 0.087 6.588 0.265 0.1182
Japan 1.215 0.060 6.201 0.301 0.1244
Korea 1.068 0.099 7.456 0.408 0.1838
Sri Lanka 1.043 0.101 4.634 0.447 0.0883
Morocco 2.256 0.243 6.599 0.344 0.0531
Mexico 1.110 0.126 7.103 0.529 0.1709
Malaysia 1.420 0.085 4.712 0.374 0.0799
The Netherlands 1.587 0.131 5.917 0.292 0.1237
Norway 1.517 0.092 5.455 0.359 0.2313
New Zealand 1.538 0.125 4.993 0.440 0.2021
Pakistan 1.371 0.170 4.621 0.420 0.0949
Panama 1.761 0.108 8.769 0.553 0.2031
Peru 0.853 0.168 5.654 0.467 0.0992
Philippines 1.107 0.072 4.914 0.407 0.1183
Poland 1.447 0.130 5.405 0.419 0.0609
Portugal 1.207 0.102 6.021 0.409 0.1780
Russia 1.167 0.180 8.320 0.567 0.0968
Singapore 1.348 0.078 4.849 0.334 0.0916
Slovak 1.010 0.151 6.332 0.550 0.0899
Sweden 1.498 0.078 5.726 0.269 0.1426
Thailand 1.245 0.110 4.396 0.429 0.1213
Turkey 1.896 0.180 6.285 0.335 0.0716
Taiwan 1.557 0.092 5.929 0.348 0.1156
USA 1.899 0.096 5.849 0.285 0.1641
Venezuela 0.831 0.110 6.081 0.505 0.1261
(continued)
Table III.
Firm-level variables for
analyses
MF
38,3
314
It is readily seen that the higher VIF or the lower the tolerance index, the higher the
variance of b
i
and the greater the chance of nding b
i
insignicant, which means that
severe multicollinearity effects are present. Thus, these measures can be useful in
identifying multicollinearity. Table VII presents the test result and VIF does not show
serious multicollinearity problem.
The regression results reveal a positive relationship between LR and nancial
leverage level and a negative relationship between CR and the usage of debt nancing.
As discussed in Section I, when employees get strong protection from high LR, they
more easily obtain benets fromcorporations through union negotiation or government
intervention. Such employees benet gain is at expense of shareholders. Since
protections for employees are exogenous, shareholders will seek a way within the
corporation to protect them from exploiting by employees. Using higher nancial
leverage to remove the free cash ow is one option shareholders can choose to achieve
this goal. When I add SR index as an additional control variable, the coefcients of LR
stay positively and increase substantially. They increased from 0.0185 to 0.043, and
from 0.0193 to 0.0506 in two estimations, respectively. The increased positive
coefcients of LR in model (2) imply that in a country where SR are higher, it is more
likely that shareholders will use high nancial leverage to mitigate agency costs
of employees if such agency costs are caused by government law and regulatory
regimes.
The negative coefcient of CR suggests that CR affect corporations nancing
decisions differently than LR. Unlike employees, creditors involve in debt contracting
directly. In a country where CR are strong, creditors have more power to negotiate with
shareholders and corporations to obtain better terms in debt contract or can easily
apply restrictions to corporations. Such restrictions might include the one that limits
corporation to use excess debt. On the other side, corporations and shareholders will
choose to use less debt since it is harder to get a favorable debt contract if CR are
strong. This result also supports the H2, which says the stronger the CR, the less debt
the rm will use.
4.4 Robust check
Regression analyses that use international sample are likely to generate biased results
due to the sample selection bias and the model misspecication (omitting variable)
bias. In robust tests, I address the rst issue by running the two-stage residual
Country MTB Prot Size Tang Debt
South Africa 1.516 0.146 5.701 0.376 0.0653
Zimbabwe 2.210 0.244 5.069 0.334 0.1080
Sample mean 1.664 0.115 5.872 0.387 0.125
Sample median 1.416 0.110 5.804 0.375 0.120
Notes: Sample period is 1990-2008; the dependent variable Debt is the long-term debt ratio computed
by long-term debt divided by total assets; MTB is the market-to-book ratio computed by the book
value of total assets minus the book value of equity plus the market value of equity all divided by the
book value of total assets; Prot is computed by EBITDA divided by total assets; Size is the log of total
assets in US dollars; Tang is the tangibility computed by tangible assets divided by total assets Table III.
Agency costs of
stakeholders
315
regression (Hoefer, 2002; Chui et al., 2002) and overcome the second bias by including
additional control variables.
The major research objective of this paper is to examine the impacts of country-level
CR and employee rights on nancing across countries, using rm-level variables as
control variables. The pooled sample regressions have two limitations. First, running
pooled sample regression cannot totally remove the disturbance of rm-level variables.
Second, including all countries in the sample results in unequal weights in sample.
Country SR CR LR GOV_QUL ECO_GLB GDPG Ination Bank Bond
Stock
Market
Panel B: civil law countries
Argentina 0.34 1 0.3 20.74 3.24 20.284 7.83 0.274 0.047 0.316
Austria 0.21 3 0.52 1.53 5.13 1.945 1.5 1.230 0.328 0.196
Belgium 0.54 2 0.6 1.32 5.5 1.945 1.58 1.172 0.449 0.570
Brazil 0.27 1 0.25 0 3.44 0.87 9.33 0.577 0.087 0.310
Switzerland 0.27 1 0.25 1.45 5.16 0.98 0.86 1.716 0.439 1.891
Chile 0.63 2 0.12 1.41 4.63 3.779 4.1 0.546 0.159 0.865
China 0.76 2 0.14 20.19 3.16 8.156 0.37 0.063 0.315
Colombia 0.57 0 0.078 0.1 3.41 1.244 9.12 0.353 0.005 0.178
Czech Republic 0.33 3 0.3 0.95 4.41 0.742 2.88 0.589 0.046 0.233
Germany 0.28 3 0.38 1.39 4.35 1.698 0.82 1.346 0.461 0.385
Denmark 0.46 3 0.8 1.81 4.42 1.618 2.13 0.962 1.099 0.486
Egypt 0.2 2 0.27 20.44 3.41 2.74 3.41 0.709 0.300
Spain 0.37 2 0.13 1.06 4.81 2.068 3.81 1.172 0.228 0.566
Finland 0.46 1 0.84 1.7 5.15 2.424 1.52 0.714 0.284 0.902
France 0.38 0 0.09 1.06 4.79 1.728 1.41 1.040 0.450 0.606
Greece 0.22 1 0.354 0.79 4.65 1.451 3.45 0.738 0.023 0.389
Hungary 0.18 1 0.66 1.1 4.58 1.565 8.69 0.447 0.020 0.192
Indonesia 0.65 2 0.012 20.26 3.54 3.853 12.4 0.446 0.014 0.223
Italy 0.42 2 0.4 0.84 3.64 1.99 2.48 0.870 0.358 0.340
Japan 0.5 2 0.24 1.27 4.16 2.247 21.73 2.070 0.439 0.787
Korea 0.47 3 0.138 0.7 3.64 5.763 1.94 0.712 0.465 0.477
Morocco 0.56 1 20.15 3.14 1.4 0.87 0.528 0.278
Mexico 0.17 0 0.4 0.43 3.55 1.335 9.7 0.314 0.074 0.282
The Netherlands 0.2 3 0.28 1.65 5.57 1.726 3.42 1.339 0.416 0.946
Norway 0.42 2 0.8 1.34 4.64 2.489 4.86 0.716 0.215 0.378
Panama 0.16 4 0.12 0.33 4.35 1.358 0.55 0.710 0.215
Peru 0.45 0 0.05 0.11 3.85 20.037 2.36 0.195 0.024 0.240
Philippines 0.22 1 0.12 20.06 3.17 0.443 5.59 0.429 0.003 0.491
Poland 0.29 1 0.13 0.64 3.67 3.18 3.8 0.322 0.000 0.145
Portugal 0.44 1 0.35 1 4.86 2.787 3.7 1.144 0.188 0.312
Russia 0.44 2 0.63 20.45 3.07 20.063 31.22 0.220 0.000 0.293
Slovak Republic 0.29 2 0.5 1.08 4.22 1.063 5.55 0.565 0.000 0.074
Sweden 0.33 1 0.9 1.44 5.05 1.689 1.61 0.721 0.476 0.895
Turkey 0.43 2 0.12 0.21 3.75 1.429 45.38 0.289 0.002 0.189
Taiwan 0.56 2 0.35 0.94 5.691 21.11 0.218 1.013
Venezuela 0.09 3 0.28 21.35 3.13 21.5 26.31 0.144 0.004 0.091
Civil law mean 0.377 1.722 0.340 0.667 4.150 1.986 6.159 0.745 0.215 0.455
Civil law median 0.375 2.000 0.280 0.890 4.220 1.694 3.415 0.710 0.159 0.316
Sample mean 0.487 1.981 0.315 0.720 4.240 2.176 7.626 0.792 0.211 0.605
Sample median 0.440 2.000 0.270 0.925 4.330 1.936 2.945 0.714 0.150 0.400
Table IV.
SR, CR, and LR indices
and country-level control
variables
MF
38,3
316
Some countries such as the USA, Britain, and Japan have a much larger number of
observations than other countries do. Consequently, the results cannot exclude
the excess impact of those big countries. To overcome such limitations, I use a
two-stage regression model to remove the rm-level factors and to exclude the sample
selection bias.
In the rst stage, following Chui et al. (2002), I construct an adjusted dependent
variable by following method. First, debt ratio for rmi at year t in county j is estimated
by the following Default (rm and county subscription suppressed):
Debt
t
a
1
a
2
MTB
t
a
3
Profit
t
a
4
Cash
t
a
5
Size
t
a
6
Tang
t
1
t
3
The dependent and independent variables are dened the same as in Section II. Then,
I use the residual of this equation as the adjusted debt ratio.
After building the adjusted debt ratio for each rm at each year, in the second stage,
I calculate the mean of adjusted debt ratio for each country at each year and then use
country mean of adjusted debt ratio as dependent variables to run the cross-national
regression model:
MeanAdjDebt
t
bX 1 4
X is the vector of country-level variables.
Debt ratio
Primary Manufacturing
Advanced
manufacturing Services Pooled
MTB 20.0001 20.0000 20.0000 20.0001
* * *
20.0002
* * *
(0.80) (0.44) (0.24) (2.64) (5.07)
Prot 20.0947
* * *
20.1774
* * *
20.1599
* * *
20.0807
* * *
20.0588
* * *
(13.08) (23.84) (30.59) (16.14) (12.14)
Size 0.0279
* * *
0.0418
* * *
0.0279
* * *
0.0305
* * *
0.0230
* * *
(26.58) (43.64) (39.35) (51.08) (53.11)
Tang 0.0955
* * *
0.1009
* * *
0.1458
* * *
0.1597
* * *
0.1557
* * *
(17.42) (17.75) (28.79) (39.03) (38.16)
Constant 20.0601
* * *
20.1241
* * *
20.0685
* * *
20.0739
* * *
20.0699
* *
(10.13) (20.38) (15.40) (20.28) (2.01)
No. of
obs 16,472 37,286 55,333 62,090 171,181
No. of
rms 2,354 4,593 6,943 8,613 22,503
Adj. R
2
0.0704 0.0711 0.0602 0.0709 0.2035
Notes: Signicant at:
*
10,
* *
5,
* * *
1 percent; absolute value of t-statistics in parentheses; the t-
statistic reported in parentheses controls for rm clustering standard errors; this table presents the
regression results of the following Default (with rm subscripts suppressed):
Debt
t
a
1
a
2
MTB
t
a
3
Profit
t
a
4
Cash
t
a
5
Size
t
a
6
Tang
t
1
t
sample period is 1990-2008; the dependent variable Debt is the long-term debt ratio computed by long-
term debt divided by total assets; MTB is the market-to-book ratio computed by the book value of total
assets minus the book value of equity plus the market value of equity all divided by the book value of
total assets; Prot is computed by EBITDA divided by total assets; Size is the log of total assets in US
dollars; Tang is the tangibility computed by tangible assets divided by total assets
Table V.
Firm and industry factors
and nancial leverage
Agency costs of
stakeholders
317
The two-stage regression results are presented in Table VIII. After removing rm-level
factors totally and controlling for sample selection bias through two-stage regression,
the tests results stay statistically signicant.
To address the omitting variable issue, I run the robust tests by adding additional
country-level controlling variables and re-run the two-stage regression. Following the
prior research, I add both country-level corporate governance quality variables such as
government quality index and ownership concentration index and economic variables
Debt ratio
(1) (2)
MTB 20.0002
* * *
20.0002
* * *
(6.28) (5.40)
Prot 20.0620
* * *
20.0631
* * *
(12.78) (12.96)
Size 0.0212
* * *
0.0221
* * *
(49.36) (50.79)
Tang 0.1632
* * *
0.1609
* * *
(40.55) (40.06)
SR 0.0586
* * *
(14.07)
LR 0.0185
* * *
0.0473
* * *
(3.74) (8.90)
CR 20.0167
* * *
20.0228
* * *
(24.01) (26.25)
Constant 20.0445 20.0804
*
(1.16) (1.94)
No. of obs 171,150 171,150
Adj. R
2
0.2192 0.2240
Notes: Signicant at:
*
10,
* *
5,
* * *
1 percent; robust t-statistics in parentheses; the t-statistic reported
in parentheses controls for rm clustering standard errors; this table presents the regression results of
the following Default (with rm subscripts suppressed):
Debt
t
a
1
a
2
MTB
t
a
3
PROFIT
t
a
4
CASH
t
a
5
SIZE
t
a
6
Tang
t
a
7
SRa
8
CRa
9
LR1
t
where model (1) tests the impact of CRand LRon debt ratio and model (2) test the compounded impact of
SR, creditor right, and labor right on debt ratio; sample period is 1990-2008; the dependent variable Debt
is the long-term debt ratio computed by long-term debt divided by total assets; MTB is the market-to-
book ratio computed by the book value of total assets minus the book value of equity plus the market
value of equity all divided by the book value of total assets; Prot is computed by EBITDA divided by
total assets; Size is the log of total assets in US dollars; Tang is the tangibility computed by tangible
assets divided by total assets; SR and CR are shareholder rights and creditor rights from Djankov et al.
(2008) and Djankov et al. (2007), respectively. LR is the labor rights from Botero et al. (2004)
Table VI.
Impacts of CR and LR on
nancial leverage
Variable VIF Tolerance R
2
SR 1.59 0.6306 0.3694
CR 1.53 0.6515 0.3485
LR 1.28 0.7826 0.2174
Mean VIF 1.47
Table VII.
Variance ination factors
MF
38,3
318
such as GDP growth rate, bond market development measure, and banking section
development measure. The regression results are reported in Table IX.
The above robust tests results show that the coefcients of major target variables:
CR and LR, stay statistically signicant. These signicant results support the
hypotheses. Specically, LR have a positive relationship with debt ratio whereas CR
have a negative relationship with debt ratio.
V. Conclusion
This paper explores the relationship between CR as well as employee rights and capital
structure across countries. The results reveal the impacts of bargainingpowers of creditors
and employees on capital structure given a countrys legal and political framework.
MeanAdjDebt
Common law countries Civil law countries Full sample Full sample
SR 0.0421
* * *
0.0224
* * *
0.0306
* * *
(5.06) (2.83) (3.57)
CR 20.0055
* * *
20.0038
* *
20.0055
* * *
(2.89) (2.12) (2.88)
LR 0.0530
* * *
0.0239
* *
0.0324
* * *
0.0321
* * *
(5.96) (2.25) (2.92) (2.92)
STKGDP 20.0000 20.0001
*
20.0001
*
(0.99) (1.94) (1.94)
GOV_QUAL 0.0162
* * *
0.0136
* * *
0.0126
* * *
(3.70) (3.13) (2.87)
ECO_GLB 0.0002 0.0005 0.0019
(0.06) (0.14) (0.55)
Constant 20.0450
* * *
20.0293
* *
20.0474
* * *
20.0455
* * *
(8.01) (2.27) (3.77) (3.65)
No. of obs 830 814 814 814
R
2
0.0987 0.1130 0.1144 0.1244
Notes: Signicant at:
*
10,
* *
5,
* * *
1 percent; robust t-statistics in parentheses; the t-statistic reported
in parentheses controls for county clustering standard errors; this table presents the regression results
of the following model:
MeanAdjDebt
t
bX 1
where X is a vector of country-level variables; STKGDP, the stock market capitalization to GDP, is
from World Bank; GOV_QUAL is the regulation quality of government, obtained from Kaufmann et al.
(2007); ECO_GLB is the economic globalization index from World Bank; the dependent variable,
MeanAdjDebt, is the country mean of residuals of the following model (with rm subscription
suppressed):
Debt
t
a
1
a
2
MTB
t
a
3
Profit
t
a
4
Cash
t
a
5
Size
t
a
6
Tang
t
1
t
where Debt is the long-term debt ratio computed by long-term debt divided by total assets; MTB is the
market-to-book ratio computed by the book value of total assets minus the book value of equity plus
the market value of equity all divided by the book value of total assets; Prot is computed by EBITDA
divided by total assets; Size is the log of total assets in US dollars; Tang is the tangibility computed by
tangible assets divided by total assets; SR and CR are shareholder rights and creditor rights
from Djankov et al. (2008) and Djankov and Shleifer (2007), respectively; LR is the labor rights from
Botero et al. (2004); sample period is 1990-2008
Table VIII.
Country-level corporate
governance factors and
debt ratio
Agency costs of
stakeholders
319
MeanAdjDebt
(1) (2)
GDPG 0.0069
* * *
0.0076
* * *
(3.69) (3.96)
Ination 20.0002
(0.54)
STKGDP 20.0098
* * *
20.0088
* *
(2.80) (2.27)
Bond 0.0465
* * *
0.0505
* * *
(7.55) (6.90)
Bank 0.0190
* * *
0.0234
* * *
(4.10) (5.03)
SR 0.0431
* * *
0.0470
* * *
(3.55) (3.86)
CR 20.0117
* * *
20.0119
* * *
(4.95) (5.24)
LR 0.0375
* * *
0.0452
* * *
(4.14) (4.10)
GOV_QUAL 20.0063
(1.05)
ECO_GLB 0.0005
(0.14)
Constant 20.0631
* * *
20.0714
* * *
(8.25) (4.77)
Observations 746 746
R
2
0.2504 0.2523
Notes: Signicant at:
*
10,
* *
5,
* * *
1 percent; robust t-statistics in parentheses; the t-statistic reported
in parentheses controls for county clustering standard errors; this table presents the regression results
of the following model:
MeanAdjDebt
t
bX 1
where X is a vector of country-level variables; GDPG is the GDP growth rate; Ination is the ination
rate; Bond is the private bond capitalization to GDP; Bank is the domestic bank deposits to GDP;
STKGDP, the stock market capitalization to GDP, is from World Bank; GOV_QUAL is the regulation
quality of government, obtained from Kaufmann et al. (2007); ECO_GLB is the economic globalization
index from World Bank; the dependent variable, MeanAdjDebt, is the country mean of residuals of the
following model (with rm subscription suppressed):
Debt
t
a
1
a
2
MTB
t
a
3
Profit
t
a
4
Cash
t
a
5
Size
t
a
6
Tang
t
1
t
where Debt is the long-term debt ratio computed by long-term debt divided by total assets; MTB is the
market-to-book ratio computed by the book value of total assets minus the book value of equity plus
the market value of equity all divided by the book value of total assets; Prot is computed by EBITDA
divided by total assets; Size is the log of total assets in US dollars; Tang is the tangibility computed by
tangible assets divided by total assets; SR and CR are shareholder rights and creditor rights from
Djankov et al. (2008) and Djankov and Shleifer (2007), respectively; LR is the labor rights from
Botero et al. (2004); sample period is 1990-2008
Table IX.
Country-level economic
factors and debt ratio
MF
38,3
320
In corporate governance context, stakeholders such as shareholders, creditors, and
employees have heterogeneous utility functions. As a result, a game is played among
those stakeholders within a countrys legal and political framework. As rm residual
claimants, shareholders stand on the one side of the game whereas other stakeholders
stand on the other side. When stakeholders other than shareholders pursue to maximize
their benets and interests within corporations, their gains are at the expense of
shareholders. This is the essential of interaction between stakeholders.
Using country-level CR index and LR index as a proxy for bargaining powers of
creditors and employees, respectively, I nd a positive correlation between employee
rights and rms use of debt and a negative correlation between CR and rm debt ratio.
This is because when employee rights are high, shareholders are more likely to be
exploited by employees. If so, shareholders intend to use more debt obligation to
remove free cash ows to reduce employees opportunities to obtain more benets from
the rm. When CR are high, creditors have more negotiation power to obtain good
terms in debt contracting, making debt less attractive to shareholders.
The empirical results are robust by controlling for sample selection bias, test model
specication, and a series of country-level control variables. The results obtained from
this paper helps us to understand nancial leverage in different countries with various
corporate governance mechanisms and lls signicant gaps in the literature on
international nancing policy. These results should be of interest to managers,
investors, and policymakers.
Notes
1. Studies on international capital structure include Aggarwal (1990), Rajan and Zingales
(1995), Aivazian et al. (2001) and Gaud et al. (2007), among others.
2. I also used 1 percent winsorized sample and original sample to run all tests. The tests results
do not change qualitatively.
3. LLSV (2000) classify non-nancial rms into seven broad industrial groups: (1) agriculture;
(2) mining; (3) construction; (4) light manufacturing; (5) heavy manufacturing; (6)
transportation, communications and utilities; and (7) services.
4. Since debt ratio is censored by zero at lower bound, we also use Tobit model to regress debt
ratio on the same rm-level independent variables, the SR, CR, and LR indices with year and
industry xed effect. The coefcients of CR and LR stay signicant statistically with the
expected sign. Since Tobit model cannot generate robust standard errors, we report our
results based on OLS regression.
References
Acharya, V.V., Amihud, Y. and Litov, L. (2011), Creditor rights and corporate risk-taking,
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About the author
Dr Bing Yu is an Assistant Professor of Finance at the School of Business, Meredith College,
Raleigh, North Carolina, USA. Bing Yu can be contacted at: yubing@meredith.edu
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