سرمایه انسانی، ساختار سرمایه و دستمزد کارکنان: تجزیه و تحلیل تجربی
|کد مقاله||سال انتشار||مقاله انگلیسی||ترجمه فارسی||تعداد کلمات|
|18846||2013||25 صفحه PDF||سفارش دهید||19259 کلمه|
Publisher : Elsevier - Science Direct (الزویر - ساینس دایرکت)
Journal : Journal of Financial Economics, Volume 110, Issue 2, November 2013, Pages 478–502
We test the predictions of Titman (1984) and Berk, Stanton, and Zechner (2010) by examining the effect of leverage on labor costs. Leverage has a significantly positive impact on cash, equity-based, and total compensation of chief executive officers (CEOs). Compensation of new CEOs hired from outside the firm is positively related to prior-year firm leverage. In addition, leverage has a positive and significant impact on average employee pay. The incremental total labor expenses associated with an increase in leverage are large enough to offset the incremental tax benefits of debt. The empirical evidence supports the theoretical prediction that labor costs limit the use of debt.
The trade-off theory of capital structure points to bankruptcy costs as the main reason that firms in many industries do not assume higher levels of leverage to take advantage of the corporate tax saving benefits of debt. However, considerable empirical evidence indicates that the magnitude of direct bankruptcy costs is too low to be a sufficient disincentive preventing firms from taking on higher levels of debt. Some authors have, therefore, suggested indirect bankruptcy costs as a solution to the puzzle of the observed underleveraging of firms in many industries. In an important paper, Titman (1984) develops a model in which a firm's liquidation decision is causally linked to its bankruptcy status. He argues that customers, workers, and suppliers of firms that produce unique or specialized products are likely to suffer high costs in the event of liquidation. In particular, in a setting where employees have firm-specific human capital, the fact that bankruptcy can impose significant costs on employees (by reducing the value of their human capital) can significantly affect firms' capital structures.1 Formalizing the Titman (1984) arguments, Berk, Stanton, and Zechner (2010; BSZ (2010) hereafter) develop a model incorporating the idea that human capital costs associated with financial distress and bankruptcy could be large enough to be a disincentive for firms to issue debt. The objective of this paper is to empirically analyze, for the first time in the literature, whether human capital costs are an important determinant of the capital structure of firms as postulated by the theoretical literature. We do this by examining the relation between the observed capital structures of firms and the compensation of their chief executive officers (CEOs), as well as the relation between observed capital structures and the average wages of their work forces. While we use CEO compensation to measure the pay of a critical employee, we use the average employee wage to measure the compensation of a collective employee. In the model of BSZ (2010), each firm faces a risk-averse employee and risk-neutral investors. In the optimal labor contract between firms and employees, a firm with higher leverage pays a higher wage to its employee to compensate him for the expected bankruptcy costs that will be borne by the employee, because the employee is unable to fully insure his human capital risk. Firms, therefore, choose not to increase leverage beyond the point where the marginal tax benefits of debt are offset by the incremental labor costs associated with higher levels of debt. The empirical implication here is that, in the cross section, firms with higher leverage are associated with higher employee pay.2 We test this prediction (“the Titman-BSZ prediction”) in our empirical analysis. We also study whether the magnitude of the additional compensation associated with an increase in leverage is large enough to at least partially explain the underleveraging of firms. In contrast to the theories that focus on the ex ante relation between leverage and employee pay, Perotti and Spier (1993) focus on the ex post effect of leverage on employee pay.3 In particular, they argue that firms are able to use leverage strategically when current profits are low and future investment is necessary to guarantee full payment of the union's claim (wages). By retiring equity through a junior debt issue, shareholders can credibly threaten not to undertake valuable new investments unless the union agrees to wage reductions. The implication of the argument is that, under suitable conditions, firms with high leverage are associated with lower employee pay. The ex post relation between leverage and employee pay implied by the model of Perotti and Spier (1993), however, is not inconsistent with the ex ante relation between the same variables in the Titman-BSZ prediction. As Perotti and Spier (1993) point out, if workers anticipate that equity holders could attempt to use higher leverage to negotiate their wages downward ex post, they will demand higher expected wages ex ante to compensate them for bearing this risk. Perotti and Spier (1993) also point out that a firm will not be able to use leverage as a bargaining tool to reduce employee wages if their profits from existing assets are large (i.e., the firm does not face a significant probability of financial distress). We make use of these results to empirically disentangle the ex ante effects suggested by the Titman-BSZ prediction from the ex post effects suggested by Perotti and Spier (1993). We accomplish this by splitting our sample between firms approaching financial distress (distressed firms) and those that do not face a significant probability of distress (safe firms). We find that the debt ratio of a firm positively affects the magnitude of its CEO compensation. Firms with higher leverage pay their CEOs more, in terms of total compensation, cash pay, and equity-based pay. In our ordinary least squares (OLS) regressions, an increase in market leverage by one standard deviation is associated with an increase of more than 8% in CEO total compensation, a magnitude that is economically significant. We recognize that unobserved CEO characteristics could influence firm leverage as well as CEO pay, so that the direction of causality can be ambiguous. For example, CEOs who have had more interaction with the board (and, therefore, have more influence) could have greater ability to affect their own pay and at the same time choose the firm's leverage level. To address this issue, we study the relation between the first-year compensation of newly appointed CEOs who are hired from outside and firm leverage in the year prior to their appointment. Clearly, newly appointed CEOs who are hired from outside should have no influence on the firm's leverage in the year prior to their appointment. We show that, even in the case of new CEOs hired from the outside, compensation is positively related to leverage. We also find that leverage has a positive and significant impact on average employee pay. Further, the incremental labor expenses associated with an increase in leverage are large enough to offset all of the incremental tax benefits arising from such an increase. For a firm with median values of leverage, average employee pay, total labor expenses, and total debt, if the market leverage ratio increases by one standard deviation, total labor expenses increase by $14.01 million, holding the number of employees constant. Assuming 6% as the average return on debt in our sample from 1992 to 2006 and assuming a tax rate of 35%, the tax benefits of debt increase by $5.09 million, smaller than the increase in total labor expenses of $14.01 million. This supports the hypothesis that the incremental labor costs associated with an increase in leverage are economically significant and large enough in magnitude to limit the use of debt. One potential concern with our baseline analysis is the endogeneity of leverage. In particular, the assets of a given firm could be such that they can support a high level of leverage (for example, the proportion of tangible assets could be high) and could also require highly paid employees to operate these assets, thus generating a positive correlation between leverage and employee pay. To deal with this potential endogeneity problem, we employ an instrumental variable, namely, the marginal corporate tax rate, to generate an exogenous variation in leverage. The theoretical literature in corporate finance suggests that the tax benefit of debt is positively related to a firm's marginal tax rate, thus resulting in a positive correlation between a firm's marginal tax rate and its leverage ratio. The empirical literature also supports the positive relation between marginal tax rate and leverage (see, e.g., Leary and Roberts, 2010). At the same time, no theoretical or empirical literature indicates that the marginal corporate tax rate directly affects employee pay. Using the marginal corporate tax rate as the instrument, we study the relation between leverage and average employee pay in a two-stage least squares (2SLS) regression framework. The results confirm that, even after accounting for the potential endogeneity of leverage, firms with a higher level of leverage are associated with a higher level of average employee pay.4 Using the sample of manufacturing firms in the US over 1974–1982, Titman and Wessels (1988) find that firms with more specialized labor have lower debt ratios. Because more specialized workers are paid more, this suggests a negative relation between leverage and wages. If labor specialization is related to both leverage and employee pay, the omission of labor specialization from the regression of employee pay could cause a bias in the estimated coefficient of leverage. We address this issue by examining the quits rate, the percentage of the industry's total work force that voluntarily left their jobs in the sample years. Following Titman and Wessels (1988), we use quits rate as our proxy for labor specialization. A lower quits rate corresponds to greater labor specialization. We find that the quits rate is negatively correlated with average employee pay, consistent with the notion that more specialized workers are paid more. However, we find that the correlation between leverage and the quits rate is not statistically significant. Furthermore, in our multivariate regression of average employee pay in which the quits rate is included as an explanatory variable, the quits rate is insignificant, and the coefficient of leverage remains positive and significant. We also empirically disentangle the ex ante relation between leverage and employee pay from the ex post effects suggested by Perotti and Spier (1993). To accomplish this, we split our sample based on each firm's Altman Z-score and study safe and distressed firms separately. Consistent with the Titman-BSZ prediction, the relation between leverage and average employee pay is positive and significant in the sample of safe firms. Meanwhile, the coefficient of leverage is negative in the distressed sample, but not statistically significant. This suggests that, while the ex ante relation between leverage and employee pay suggested by Titman-BSZ prediction dominates in our entire sample and in the subsample of safe firms, in distressed firms the ex post relation postulated by Perotti and Spier (1993) could partially or fully offset the effect of firms compensating employees for their human capital risk due to higher leverage. This is not surprising, because it is precisely in distressed firms that we expect the ability of firms to use leverage as a bargaining tool with employees to be the strongest [as pointed out by Perotti and Spier (1993)]. Labor expenses, which we use to compute average employee pay, are missing for a number of firms in the Compustat database. This creates a potential sample-selection bias if firms selectively decide whether or not to report this information. To adjust for this potential selection bias, we adopt a Heckman (1979) two-step analysis. Our results are robust to the Heckman procedure. The second stage of our Heckman two-step analysis indicates that, even after controlling for potential sample selection, leverage has a positive effect on average employee pay. Employee entrenchment is an important element in the model of BSZ (2010). Entrenchment in their model means that employees are unable to fully insure their human capital risk. BSZ (2010) argue that employee entrenchment is the reason that an employee demands a higher wage from a firm with higher leverage. This allows us to conduct yet another test of the Titman-BSZ prediction. We expect to observe a stronger effect of leverage on labor costs when the employee is more entrenched. To empirically test the effect of employee entrenchment on the leverage-wage relation, we examine technology versus nontechnology firms. Existing evidence (e.g., Anderson, Banker, and Ravindran, 2000) suggests that employees in nontechnology firms are more entrenched than in technology firms (in the sense that the potential reduction in employees' human capital if their firm goes bankrupt is greater). Given this, the impact of leverage on employee compensation in nontechnology firms can be expected to be greater than in technology firms. We, therefore, split our sample between technology and nontechnology firms and conduct our analysis separately on these two subsamples. We find that the influence of leverage on the cash, equity-based, and total compensation of CEOs is positive and significant in nontechnology firms. In technology firms, leverage affects the cash pay of CEOs, but it does not have significant effects on their total or equity-based compensation. The leverage ratio also has a positive and significant effect on average employee pay in nontechnology firms, but not in technology firms. Thus, the effect of leverage on CEO compensation as well as on average employee pay is greater for nontechnology firms than for technology firms, consistent with the Titman-BSZ prediction. Our paper is related to the empirical literature examining the notion that leverage could serve as a bargaining tool for firms against labor and could thereby have a disciplining effect on labor. See, e.g., Benmelech, Bergman, and Enriquez (2009), who show that airlines in financial distress obtain wage concessions from employees whose pension plans are underfunded; Matsa (2010), who finds that firms characterized by greater union bargaining power use greater leverage; and Hanka (1998), who shows that firms using higher levels of debt reduce employment more often and use more part-time or seasonal employees. Our empirical results do not necessarily contradict those of the above cited literature. As pointed out by Perotti and Spier (1993), the disciplining effect of debt on labor is greater in firms with a significant chance of financial distress and can coexist with employees demanding greater wages ex ante (to induce them to join firms with greater leverage ratios). These greater wages could be required not only to compensate employees for the potential loss of their human capital in the event that the firm goes bankrupt [as suggested by Titman (1984) and BSZ (2010)], but also for the potential reduction in wages or other benefits arising from their lower bargaining power ex post if the firm enters financial distress subsequent to their joining it. The fact that the positive relation we find between leverage ratios and employee pay arises mostly from the subsample of safe firms (in which the disciplining effects of debt on the employment relation is likely to be the least), suggests that both of the effects could be operating in employee–firm relations in practice.5 Our paper contributes to the literature by showing, for the first time, that leverage has a positive impact on employee compensation (as measured by either CEO compensation or average employee pay) and that, at the existing median debt level, the incremental labor costs associated with an increase in leverage are sufficient to offset the incremental tax benefits of debt. Our study helps to establish the importance of labor costs in capital structure decisions and, thus, advance our understanding of the determinants of corporate leverage. Finally, ours is the first paper that explicitly analyzes the relation between executive compensation and capital structure. While a large prior literature exists on executive compensation as reviewed by, e.g., Frydman and Jenter (2010), to our best knowledge, no prior research has empirically analyzed the relation between executive compensation and capital structure. The rest of this paper is organized as follows. Section 2 reviews the relevant theory in more detail and develops testable hypotheses. Section 3 describes our data and sample selection procedures. Section 4 presents our empirical analysis of the relation between capital structure and CEO compensation. Section 5 presents our empirical analysis of the relation between capital structure and average employee pay. Section 6 compares our empirical results for technology versus nontechnology firms. Section 7 presents some additional robustness tests. Section 8 summarizes our results, discusses the limitations of our instrumental variable analysis, and concludes.
نتیجه گیری انگلیسی
Given the potentially large tax benefits of debt, why do firms adopt a low level of leverage? The existing literature shows that direct bankruptcy costs are not large enough to justify the empirically observed low leverage ratios of firms. Titman (1984) and Berk, Stanton, and Zechner (2010) argue theoretically that a particular form of indirect bankruptcy cost, namely, the incremental employee pay associated with an increase in debt, is large enough to prevent firms from increasing their leverage ratios. In this paper, we empirically test this prediction. Specifically, we answer the following questions: First, does higher leverage result in greater employee compensation? Second, are the additional labor costs associated with higher leverage large enough to offset the incremental tax benefits of debt? We conduct our empirical analysis using two measures of employee compensation: the magnitude of CEO compensation and average employee pay. We find that the effect of leverage on the magnitude of CEO compensation is economically and statistically significant. For the whole sample, leverage has a positive effect on cash, equity-based, and total compensation of CEOs in our multivariate regressions. To establish causality, we also study the relation between the compensation of newly appointed CEOs who are hired from outside and firm leverage in the year before their appointment. We find that leverage has a significant effect on the magnitude of the compensation of a new CEO. An increase of one standard deviation in leverage corresponds to a 19% increase in the total compensation of a new CEO. In both OLS and instrumental variable regressions, we find that leverage also influences average employee pay positively and significantly. Further, we show that, for a firm with the median level of leverage, the incremental tax benefits arising from increased leverage are offset by the additional labor costs associated with such an increase. The effect of leverage on average employee pay is positive and significant for financially safe firms, but the impact is insignificant for financially distressed firms. We also find that, while leverage has a positive and significant influence on CEOs' cash, equity-based, and total compensation in nontechnology firms, it does not have a significant influence on CEOs' total or equity-based compensation in technology firms. The effect of the leverage ratio on average employee pay is also greater in nontechnology firms than in technology firms. Because employees in nontechnology firms can be viewed as more entrenched (in the sense of BSZ (2010)), this provides additional support for the Titman-BSZ prediction. Our instrumental variable analysis to control for the endogeneity of leverage has some limitations. In particular, one potential criticism of the instrument we use, namely, the marginal tax rate, is that the independent variation in this variable can arise only from past losses and relatively recent investments with investment tax credits, both of which could independently influence wages. However, even though the marginal tax rate could be an imperfect instrument, it allows us to address the endogeneity of leverage to a significant degree, in the absence of a natural experiment that could have allowed us to account for the potential endogeneity of leverage unambiguously.