Employee Treatment and Contracting with Private Lenders

Abstract

Empirical evidence is scant on the dynamic interactions among nonshareholder stakeholders. Adopting an instrument approach for stakeholder management, we focus on two primary stakeholder groups (employees and creditors) to investigate empirically the relationship between employee treatment and loan contracts with banks. We find strong evidence that fair employee treatment reduces the cost of bank loans and limits the usage of restrictive financial covenants in loan contracts. We use the propensity-score matching method to control for potential endogeneity issue, and we also conduct a Rosenbaum sensitivity analysis to test for hidden bias. We contribute to stakeholder theory development by identifying a novel mechanism through which strategic stakeholder management creates value for shareholders.