Abstract
Present paper investigates the interactions between firm’s key financial decisions and its fair employee treatment and welfare policies. Fair employee treatment has two components—measurable and unmeasurable. Certain ratios like employee compensation to sales, employee compensation to total assets, and total employee welfare to sales are computed to capture the measurable part of fair employee treatment. To envisage the unmeasurable component, a dummy variable for fair employee treatment is used which is based on the listing of the firm in India’s Best Companies to Work for 2017: The complete List prepared by Great Place to Work and published by Economic Times. Linear multiple regression analysis is conducted using firm’s leverage, price to book value, and enterprise value to EBDITA as dependent variables, and fair employee treatment, and employee compensation to sales as independent variables. Results indicate a negative relationship between employee compensation and firm valuation, and confirm that high leverage firms are more likely to cut-down on employee compensation but ensure better and fair treatment of employees. The result of binary logistic regression model predicts that firm’s dividend policy, employee stock options, and firm leverage positively impact the probability of fair employee treatment.
Highlights
Employees and executives are firms’ nonfinancial stakeholders, who can have a significant influence on its financial decisions such as capital structure, capital allocation, and payout policy
Highly levered firms are profitable as zero leverage firms, have lower employee compensation and employee welfare as percentage of their sales, ranked lowest in terms of offering ESOPs, and have lowest dividend payment amongst the three categories, these firms demonstrate highest fair employee treatment score
More employee compensation and employee welfare to sales, substantially higher contribution towards corporate social responsibility, and almost identical employee stock option as zero dividend firms, indicate that these firms, which are able to generate higher return of capital employed are able to reduce the postulated conflict amongst various stakeholders
Summary
Employees and executives are firms’ nonfinancial stakeholders, who can have a significant influence on its financial decisions such as capital structure, capital allocation, and payout policy. This creates stronger incentive for the employees to provide costly effort, and exposes them to higher risk This opportunistic behavior subjects risk averse employees and executives to higher than optimal risk due to random increase in compensation sensitivities, prompting them to request higher fixed wages when they sign the employment contract [4]. If a firm’s investment in human capital is a positive net present value project, free cash flows, firm leverage, and return of capital employed should have some influence on capital allocation in employee related activities. Present paper investigates the interactions between firm’s key financial decisions namely capital structure, payout policy, and capital allocation and its fair employee treatment and welfare plans.
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