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Labor and Corporate Governance: International Evidence from Restructuring Decisions

Literature › Works

Julian Atanassov; E. Han Kim (2009). Labor and Corporate Governance: International Evidence from Restructuring Decisions. The Journal of Finance, Vol. LXIV, No. 1. American Finance Association / Wiley.
Type journal article
Scope Comparative and methods
Method econometric
Period studied 1993–2004
Regions 41 developed and emerging economies (incl. South Africa, Zimbabwe, Germany, Japan, US, UK)
Themes comparative theory, labour markets wages, unions strikes, business and state, methods data sources
Citation key atanassov2009

Argument

The paper argues that corporate governance is shaped by the interaction of management, labor and investors, and that investor protection and labor laws cannot be studied in isolation. Where union laws are strong and investor protection is weak, poorly performing managers ally with workers: firms sell assets to avoid layoffs and workers help managers keep their jobs. These asset sales are followed by worse operating performance, whereas in strong investor protection countries asset sales improve performance and are followed by more layoffs. The argument rests on country-random-effects logit regressions on firm-level Worldscope data, using Botero et al. labor-law indices and Djankov et al. investor-protection indices.

Evidence and method

Worldscope firm data (plus Amadeus, ISI Emerging Markets and exchange sources for ownership and officers) for 25,698 industrial firms in 41 countries, 1993-2004. The distressed sample is 9,923 firms (10,947 firm-years). Legal indices: Botero et al. (2004) labor laws, Djankov et al. (2005, 2006) investor and creditor rights, ICRG Law and Order. Outcomes are proxied by changes in employees (layoffs), NPPE (asset sales) and top-two-officer turnover.

Findings

  • Strong investor protection raises the likelihood of layoffs and management turnover; strong union laws lower both. (p. 18)

    a firm in the lowest quartile of investor protection has a 5.31% (7.21%) likelihood of employee layoffs (management turnover), while an otherwise similar firm in the top quartile has a 9.83% (9.50%) likelihood.

  • Union laws protect managers, and the effect is much larger where investor protection is weak. (p. 28)

    a poorly performing firm in a bottom-quartile country in Union has a 12.33% chance of replacing management, but an otherwise similar firm in a top-quartile Union country has only an 8.07% chance

  • Asset sales are followed by worse performance in weak investor protection countries and better performance in strong ones. (p. 23)

    The median firm with asset sales shows further deterioration in performance, whereas the median firm without asset sales shows significant improvement in postdistress performance.

  • Asset sales are most frequent when investor protection is either very strong or very weak. (p. 26)

    There are more asset sales when investor protection is either very strong or very weak.

  • In weak investor protection countries, stronger unions are associated with more asset sales, consistent with worker sanction because the proceeds limit layoffs. (p. 26)

    With weak investor protection, stronger union laws lead to more asset sales, suggesting that workers sanction them because the proceeds help minimize layoffs and wage cuts.

  • Asset sales predict layoffs only where investor protection is strong, supporting the alliance hypothesis. (p. 28)

    Although asset sales lead to a significantly higher likelihood of layoffs in strong investor protection countries, no such relation is observed in weak investor protection countries

  • High leverage weakens the ability of union laws to prevent layoffs. (p. 19)

    The interaction between Union and leverage is significantly positive for Layoffs, revealing that the deterrent effect of strong union laws on layoffs is curtailed by high leverage.

  • Rigid employment contract laws are associated with more distress asset sales. (p. 26)

    employment contract laws are significantly positively related to asset sales for both sets of countries, illustrating that inflexible employment laws encourage asset sales during distress.

  • Univariate results: layoffs and asset sales are more frequent where employment laws are rigid. (p. 17)

    large-scale layoffs and major asset sales are more frequent in countries with more rigid employment laws.