An Empirical Research On Employee Compensation And Debt Conservatism

The influence of capital structure on firm value has been the core issue of scholars’ research. According to the view of trade-off theory,firms make a balance between tax benefits and costs of bankruptcy brought by debt. The firm’s optimal capital structure, on which level means maximizing the value of the company, emerges when the marginal tax benefits equal to the marginal costs of bankruptcy. However, there exists a very puzzling phenomenon in the actual operation of the company that many companies give up the benefit of debt and holding a low-debt, or even a zero-debt, for a longtime. Empirical evidence is that the leverage of these firms are significantly lower than level predicted through mainstream capital structure theory. Although scholars have carried on in-depth research on the debt conservative behavior from multiple perspectives including capital market valuation, product market competition and manager entrenchment, there is still no convincing explanation for why these firms go debt-free or low-debt. Debt conservatism has been an unsolved puzzle in the field of capital structure. After analyzing and reviewing the relevant literature about conservative debt behavior, we find the limitations of previous research. On the one hand, they ignore the research on the "anomalies phenomenon" of zero-debt. On the other hand, they also ignore the impact of implicit contract stakeholders including employees, suppliers and customers on the company’s financing decisions.In this thesis, firstly, we analyzed the Chinese Listed Companies Debt conservative status quo using their financial data. We find that the proportion of the debt conservative firms in China is growing stably with a rising trend. From the year of 2000 to 2014, on average, 11.18% of the sample firms pursued a zero-leverage(measured by interest-bearing debt, the same below), 22.5% of the sample firms pursued a leverage no more than 5%, and 31.34% of the sample firms pursued a leverage no more than 10%. Furthermore, we make an empirical research on the relationship between staff salaries and firm’s conservative debt behavior synchronously taking the extreme conservatism of zero-debt into account, which breaks the limitations of previous research. We tried to explain the debt conservatism from an important implicit contract stakeholders:The employee’s perspective. Using the financial data of China A-share listed companies in the years from 2007 to 2014 and the level of legal protection for employee in different regions of China, we respectively carried out OLS regression and Logit regression analysis against the staff salaries with debt ratio and conservative debt behavior. Our empirical results suggest that, the compensation level of employees is negatively related to the firm’s debt ratio and positively related to the probability of conservative debt. Meanwhile, in areas with higher level of legal protection for employee, the impact of staff salaries to the firm’s debt ratio and the probability of conservative debt behavior is more obvious. Our results implicit that company’s conservative financing strategy has a certain “effect of employees”, and our research provides a new explanation for debt conservatism based on employees.