Labor lawsuits and debt maturity

• DOI: https://doi.org/10.1108/CG-12-2020-0531
• Published date: 27 September 2021
• Date: 27 September 2021
• Pages: 385-404
• Subject Matter: Strategy,Corporate governance
• Author: Omer Unsal

Labor lawsuits and debt maturity

Omer Unsal

Abstract

Purpose –This paper aims to investigate how firms’ relationships with employees define their debt

maturity. The authorsempirically test the role of employee litigations in influencingfirms’ choice of short-

term versus long-term debt. The authors study employee relations by analyzing the importance of the

workplaceenvironment on capital structure.

Design/methodology/approach –The author’s test hypotheses using a sample of US publicly traded

firms between 2000 and 2017, including 3,056 unique firms with 4,256 unique chief executive officer,

adoptingthe fixed effect panel model.

Findings –The authors documentthat employee litigations have a significant negative effect on the use

of short-term debt and a significant positive affect on long-term debt. Employee litigations, along with

legal fees, outcomes and charging parties, matter the most in explaining debt maturity. In addition,

frequently sued firms abandon the short-term debt market and use less shareholders’equity to finance

their operationswhile relying more on the longer debt market.

Originality/value –To the best of the authors’ knowledge, this is the first study to examine the role of

employee mistreatmentin debt maturity choice. The study extends the lawsuitand finance literature by

examining unique, hand-collected data sets of employee lawsuits, allegations, violations, settlements,

chargingparties, case outcomes and case durations.

Keywords Corporate governance, Employee relations, Debt management, Debt maturity

Paper type Research paper

1. Introduction

The central aim of this study is to investigate the relation between employee treatment and

debt maturity for US firms. Specifically, we aim to empirically examine the relation between

corporate capital structure and workplace environment and to investigate,which aspects of

employee mistreatment exacerbate the possible relation between labor disputes and

capital structure. We measure the workplace environment with a unique hand-collected

data set of employee lawsuits, allegations, violations and complaints. We suggest that

employee relations are vital to firm performance; a better workplace environment yields

better operational performance,which ultimately increases firm value (Eccles et al.,2007).

Corporate performance has both a non-financial aspect and a financial aspect. Galema

et al. (2008) discuss the non-financial aspect of the corporate performance in terms of

corporate social responsibility (CSR), where investors are actually interested in firms’ CSR

practices and their relationship with stakeholders. On the other hand, firm leverage could

be one of the major financial aspects of corporate performance. Lenders can use price

channels (e.g. financing costs) and non-price channels (e.g. reputation) to address the

borrower risk. For price channels, Sharfman and Fernando (2008) and Girerd-Potin et al.

(2014) document that the cost of equityis lower for firms with good stakeholder relations.

However, the impact of employee relations on non-price channels, such as brand

reputation, has not been investigated in prior studies. This is important, given the fact

employee satisfaction is essential for firm performance(Edmans, 2011). Therefore, litigation

(e.g. race, sex, disability, age, religion and color) brought by employees could target not

Omer Unsal is based at

Merrimack College, North

Andover, Massachusetts,

USA.

Received 1 December 2020

Revised 24 March 2021

6 July 2021

Accepted 13 September 2021

DOI 10.1108/CG-12-2020-0531 VOL. 22 NO. 2 2022,pp. 385-404, ©Emerald Publishing Limited, ISSN 1472-0701 jCORPORATE GOVERNANCE jPAGE 385

only the workplace environment but also the financial performance of the firm. We discuss

the possibility that employee relations can affect the debt maturity of the firm by disturbing

the cash flows, lowering operating performance and profitability through expected legal

costs, settlements, reputational damages and increased uncertainty. In other words, firms

who face frequent labor disputes could sufferfrom imposed monetary penalties.

In this study, we contribute to the literature on employee relations by analyzing the

importance of the workplace environment on capital structure. Specifically, we empirically

test the role of litigation in influencing firms’ choice of short-term versus long-term debt. We

believe that our work underlines theimportance of stakeholder theory. Based on that theory,

every business has commitments to both primary (e.g. customers, employees, creditors

and suppliers) and secondary stakeholders(e.g. media, general public and regulators) who

have a “stake” in the firm, and therefore, can either affect or be affected by the actions of

the business. This is why they are a critical factor in determining firms’ success or failure

(Cornell and Shapiro, 1987;Jones, 1995;Wijnberg, 2000;Hoi and Robin, 2010).

Accordingly, we believe that any legal action involving stakeholders (in our case,

employees), would undermine the operating performance. If firms establish good

relationships with their employees,they can actually reduce future legal liabilities.

Using a sample of US firms between 2000 and 2017, we document that employee litigation

has a significant negative effect on the use of short-term debt, and a significant positive

effect on long-term debt. An increase in employee mistreatment, measured by labor

litigation, increases the percentage of total debt maturing in threeyears. Our results are

robust to different proxies for employee lawsuits, such as workplace inspections, violations,

complaints and allegations. Our findings remain the same when we address endogeneity

concerns, with additional control variables and when we perform additional estimation

methods.

Our study contributes to the literature in many ways. First, to our knowledge, this is the first

study to examine the role of the workplace environment in debt maturity choice. Second,

our study extends the lawsuit and finance literature on debt maturity by examining unique,

hand-collected data sets of employee lawsuits, allegations, settlements, charging parties,

case outcomes and case durations. Third, our study indicates that employee treatment may

be an important factor in determining firm debt maturity. Fourth, we show that corporations

issue more long-term debt whenthey suffer from managerial issues and facing deteriorated

governance practices. This is similar to Harford et al. (2008), who suggested that firms with

better corporate governance practices issue more short-term debt. Fifth, we examine the

underlying channels of how firms choose longer maturities when they are frequently sued

by their workers. We show that frequently sued firms abandon the short-term debt market

and use less shareholders’ equity to finance their operations, while relying more on the

longer debt market.

While our study is similar to Benlemlih (2017) and Nguyen et al. (2020), who examined

social responsibility and debt maturity, we differ from that study and all other previous

literature. First, none of those papers has studied the relationship between employee

mistreatment and firms’ debt maturity. Second, we expand our work by also studying how

employee allegations impact shareholders’ equity. Third, while most of those studies use

calculated CSR scores and CSR has multiple dimensions, we focus on litigations that are

filed by employees. Therefore, our work includes hand-collected data sets of employee

lawsuits, other violations, complaints and investigations. Fourth, we not only measure how

employee mistreatment affects debt maturity but also incorporate how the direct cost of

litigation affects firms’ capital structure and we measure the direct cost of litigation in terms

of charging parties (e.g. labor unions), legal fees (e.g. attorney fees and settlement fees)

and duration of the cases. Hence, our study introduces a very comprehensive data set of

employee disputes. Fifth, in addition to debt maturity, we also analyze, which investments

are financed by long-term debt, short-term debt and equity depending on the frequency of

PAGE 386 jCORPORATE GOVERNANCE jVOL. 22 NO. 2 2022