Does investing in employees affect firm debt levels?

Deskripsi

Three theoretical perspectives are examined: the stakeholder theory of capital structure, agency costs of debt, and free cash flow arguments. The stakeholder theory posits that firms committed to superior employee benefits maintain lower debt ratios to avoid financial distress, which could force cost-cutting measures and harm employee relations. Empirical evidence supports this theory, revealing a negative association between employee-friendly policies (measured by an Employee Treatment Index) and leverage. Firms with higher employee treatment scores exhibited lower debt levels, and this relationship persisted over time, indicating that employee policies influence capital structure decisions rather than the reverse.