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Managerial Finance

Agency costs of stakeholders and capital structure: international evidence
Bing Yu

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Bing Yu, (2012),"Agency costs of stakeholders and capital structure: international evidence", Managerial
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Agency costs of stakeholders
and capital structure:
international evidence
Downloaded by UNIVERSITAS TRISAKTI, Miss shellvida husniyah At 17:08 07 October 2014 (PT)

Bing Yu

Agency costs of
stakeholders

303

School of Business, Meredith College, Raleigh, North Carolina, USA
Abstract
Purpose – This paper examines the relationship between bargaining powers of creditors as well as
employees and financial leverage across countries. The purpose of this paper is to explore roles of
creditors and employees in capital structure decisions under different legal and political regimes
across countries.
Design/methodology/approach – Using country-level creditor rights index and labor rights index
as a proxy for bargaining powers of creditors and employees, respectively, the author addresses the
interaction between creditors as well as employees and shareholders. The paper tests the impact of
employee rights and creditor rights on capital structure across countries.
Findings – The author finds a positive relationship between employee rights and firms’ use of debt
and a negative relationship between creditor rights and firm debt ratio.
Social implications – The paper provides a new perspective to interpret international variation in
financial leverage in the world. The results obtained from this paper help us to understand financial
leverage in different countries with various corporate governance mechanisms.
Originality/value – This paper takes all stakeholders into account when studying agency problems;
it explores the role of creditors and employees in financing decision making under various corporate
governance patterns and political and legal systems across countries.
Keywords Corporate governance, Capital structure, Creditors, Employees, Agency problems,
Creditor rights, Labor rights
Paper type Research paper

I. Introduction
A growing interest has been given to the impact of non-financial stakeholders such as
creditors and employees on corporate decisions in corporate finance literature. This
paper examines relationship between creditors as well as employees and financial
leverage across countries. The purpose is to explore roles of creditors and employees in
capital structure decisions under different legal and political regimes across countries.
Shareholders, creditors, and employees have heterogeneous utility functions in
corporate context. Tirole (2001, 2006) asserts that corporations select optimal
investment and financing decisions within the constraints of legal and political
environments to which they belong. Within a company, stakeholders bargain with each
other to maximize benefits of themselves. The bargaining between stakeholders is ruled
and regulated by a country’s legal and political regime. While legal and political regimes
differ across countries, the bargaining powers of stakeholders are not identical in
different countries. Interaction between creditors and shareholders is mainly through
the negotiation in debt contracting. The bargaining power of creditors relies largely
JEL classification – G30, G32, G38, K3

Managerial Finance
Vol. 38 No. 3, 2012
pp. 303-324
q Emerald Group Publishing Limited
0307-4358
DOI 10.1108/03074351211201433

Shleifer. While prior research focuses on SR. 1998) find that common law countries provide stronger protection for shareholders than civil law countries do and suggest that stronger investor protection has positive impact of financial market development. 1999). on the other hand. Empirical research on cross-country financial leverage finds a large variation across countries[1]. with the constraints of legal regime in a country. I investigate the impacts of creditor and employee rights on capital structure across countries. without examining specifically the impacts of creditors and employees on financial leverage across countries. This paper is directly related to the capital structure literature that makes cross-country comparison of financial leverage. 2004). La Porta et al. will seek a mechanism within corporations to weaken creditors and employees’ bargaining powers so as to maximize payoffs. Claessens and Laeven. Employees. and Vishny (LLSV hereafter) examines the relationship between a country’s legal origin as well as level of protection for investors and finance. this paper extends the literature by exploring country-level creditors and employees’ roles in capital structure decisions across countries. (1997. creditors have more negotiation power to obtain good terms in debt contracting. and growth opportunities affect capital structure differently across countries and interpret generally the empirical results based on agency problems or signaling theories. Hail and Leuz. If so. 1995. profitability. This variation in legal and political institutions shapes the characteristics of bargaining powers of various stakeholders (Charny. My study extends the literature by exploring country level factors’ influences and by taking creditors and employees’ roles into account when examining capital structure decisions across countries. They identify how firm-level determinants of capital structure such as firm size. If shareholders cannot get a favorable debt contract. Financial leverage is a tool that shareholders can use to achieve this goal. This paper focuses on cross-country comparison. Some countries are in favor of shareholders or creditors whereas others are in favor of employees (Gourevitch and Shinn. 2003.3 Downloaded by UNIVERSITAS TRISAKTI. Around the world. Dronars and Deere (1991) develop a model to describe the role of debt in limiting employees’ bargaining power when they form unions. 2006). When CR are high. 2005. Roe. law and finance approach represented by a series of papers by La Porta. shareholders intend to use more debt obligation to remove free cash flows so as to reduce amount of revenues employees can extract. Basically. I argue that when employee rights are high. these studies merely document differences in capital structure in different countries or country groups. employees will have stronger bargaining powers and shareholders are more likely to be exploited by employees. Existing literature suggests that shareholders. Lopez-deoSilanes. countries with different legal and political systems provide different extent of supports for various stakeholders. Using country-level creditor right and labor right indices as proxies for bargaining powers of creditors and employees. they are likely to reduce the use of debt capital. Numerous studies apply this law and finance approach and link country-level shareholder rights (SR) to corporate finance decisions (Rajan and Zingales. while Matsa (2010) finds that debt is positively correlated with unionization rates at firm level for firms in the USA. .MF 38. Miss shellvida husniyah At 17:08 07 October 2014 (PT) 304 on creditor rights (CR) provided by a country’s legal system. 2006 and Pinkowitz et al.. market-to-book ratio. retained earnings. do not have voting right nor bargaining power unless they form unions or get protection from labor law. Treating a firm as a nexus through which shareholders and managers in the productive enterprise contract with each other.

Both Acharya et al. will get involved. shareholders will choose to use less debt capital so as to mitigate the bargaining power of creditors. Depending on the creditor right provided by a country’s legal regime. In regard to creditors. What is the relationship between CR and corporations’ financial leverage across countries? While exploring the role of creditors and employees in financing decision making under various corporate governance patterns and political and legal systems across countries. Basically. employees are less likely to obtain explicit or implicit benefits ( Jensen. this paper provides a new perspective to interpret international variation in financial leverage in the world. employees are less likely to obtain extra benefits from the firm even the labor law and regulatory regime provide high employee right in that country.Downloaded by UNIVERSITAS TRISAKTI. creditors. Klasa et al. creditors can diversify their investment well. The results obtained from this paper help us to understand financial leverage in different countries with various corporate governance mechanisms and fill significant gaps in the literature on capital structure. since stronger CR are in favor of creditors at expense of shareholders in debt contracting. (2011) and Vig (2011) find that in countries with stronger CR firms have lower financial leverage. When a firm has less free cash flows. shareholders’ efforts to interact with creditors and employees are constrained by a country’s institutional conditions. Dronars and Deere. and restriction on excess borrowing in the presence of high debt ratio. Thus. (2009) and Matsa (2010) analyze the strategic use of debt financing by firms in highly unionized industry areas in the USA and find that those firms use more debt to remove free cash so as to gain bargaining advantages over employees and protect firms from exploit of unions. shareholders will seek reduction of bargaining powers of creditors and employees within a corporation. creditors can negotiate with shareholders in such terms as cost of borrowing. This study addresses the following research questions: RQ1. In line with the above studies. 1991). They assert that firms are reluctant to use debt when CR are strong because financial distress costs are too high under such a situation. another stakeholder. restricted by extents of creditor and employee rights provided by a country’s legal regime. firms in countries with stronger employee rights will use more debt while firms in countries with stronger CR are likely to use less financial leverage. limitation on dividends payment in some circumstances. within legal framework. What is the relationship between country-level employee rights and corporations’ financial leverage across countries? RQ2. 1986. Shareholders will use financing strategy differently to mitigate bargaining powers of creditors and employees. creditors can protect themselves through debt contracting. I argue that across countries. Unlike employees whose human capital is tied up in the firm and not well diversified. When shareholders intend to use financial leverage to break employees and managers’ preference for overexpansion and excessive risk reduction. Since creditor and employees rights granted by law and regulatory regime are exogenous. Miss shellvida husniyah At 17:08 07 October 2014 (PT) Therefore. Agency costs of stakeholders 305 . when shareholders use debt obligation to reduce free cash flows. Myers and Saretto (2009) find that firms increase leverage in response to the possibility of union strikes when bargaining power of unions is strong. My paper is also related in general to several studies that test the stakeholder theory of capital structure at firm level.

The contradictory preferences and pursuits between shareholders and employees induce employees to seek for protection for their interests and job security through any available channels. and the pressure to avoid risky organizational change is substantial. Using country-level labor right as a proxy for employee protection (Botero et al. and hence limit the amount of cash that employees can extract through a union’s strong bargaining power. This asymmetric risk reduction between shareholders and employees induces different risk aversion levels of shareholders and employees. contracting involves negotiation and bargain. Since employee and CR are granted by a country’s legal regime. A conceptual framework is discussed and testable hypotheses are developed in Section I. under such a system. Strong employee protection makes it hard and costly to lay off employees. shareholders will choose to lessen employees and creditors bargaining powers through firm-level decisions. without driving the firm into bankruptcy. I hypothesize: H1. the costs of firing employees. employees and creditors will bargain with shareholders to pursue their best payoff. The extent of bargaining powers depends on the level of employee protection. Using financial leverage is an effective way at firm level to mitigate bargaining powers of creditors and employees. . employees have a lower bargaining power in contracting process unless they form union to get collective bargaining power. Section IV concludes the study.MF 38. shareholders suffer from the increased revenues extracted by employees due to stronger employee right. Thus. financial leverage is regarded as a tool to limit bargaining powers of creditors and employees. A legal and political system that provides strong employee protection will emphasize employees and managers’ natural agenda and demeans shareholders’ nature agenda. The most direct way employees use to protect their benefits is labor contracting. Section III discusses empirical results. When employees obtain more benefits resulting from stronger employee protection provided by a country’s labor law and regulation.3 Downloaded by UNIVERSITAS TRISAKTI. The stronger the labor right. I explore the association between country-level employee and CR and financing via testing hypotheses. the more debt the company will use. Unlike shareholders. Conceptual framework While shareholders can reduce their investment risk via diversification. Based on the above discussion. With stronger bargaining powers either through formation of labor unions or from a country’s legal regime. Therefore. employees tie their human capital to a corporation. Dronars and Deere (1991) state that firms can use debt to limit the effect that a union has on shareholder wealth because debt obligation requires firms to repay a portion of future revenues to creditors. A union can extract no more than the present value of future net cash flows. Therefore. Miss shellvida husniyah At 17:08 07 October 2014 (PT) 306 The rest of the paper is organized as follows. and the difficulties of firing employees.. 2006). However. SR. and CR provided by a country’s legal and regulatory regime. the pressure on the firm for low risk. Roe (2003) asserts that governments provide protection for employees through their law regulation in such areas as union formation. 2004) and creditor right as proxy for creditor protection (LLSV. unprofitable expansion is high. II. shareholders have incentives to use more debt to divert future cash flows to themselves rather than to employees. Section II describes data and research methodologies.

be available to each country included in our sample. Country currency exchange rate data are from Compustat Global Currency File. Jordan. Market price data are collected from Compustat Global Issue file. the less the debt the company will use. 2001). SIC code . To avoid this sample selection bias. The stronger the creditor right. the more negotiating power creditors have during contracting process. CR. Creditor can influence a firm’s financing decision through debt contracting. All firm-level financial accounting variable data are obtained from Global Industrial file. Croatia. The sample period is 1990-2008. I begin sample construction by matching Compustat Global Industrial with Global Issue and Global Currency files. I match firm-level data from Global Vantage with country-level data from various resources and require main three country-level explanatory variables.1 Data sources and sample selection The primary data source for the paper is Compustat Global Vantage. When a country’s legal regime is in favor of employees. missing value of total assets. Aivazian et al. and utility firms (4999 . and (LR) data from Djankov et al. SIC code . Ghana. (2004).. The stronger the creditor right. They notice that not every country requires firms to report consolidated balance sheets. 1995. 4900). I collected macro economic data including stock market capitalization. Agency costs of stakeholders 307 . Djankov and Shleifer (2007) and Botero et al.However. banking segment. (2007). Country-level variables are obtained from previous research in each aspect. corporations will choose to use more debt: Downloaded by UNIVERSITAS TRISAKTI. and negative cash flows. shareholders would prefer to go slow in expanding the firm. inflation rate from IMF and World Bank annual statistics. Government quality data are from Kaufmann et al. To avoid unprofitable expansion and to eliminate the possibility of raising employees’ salaries and benefits. 2001). Miss shellvida husniyah At 17:08 07 October 2014 (PT) H2. shareholders want to remove free cash flows from the firm via using more interest-bearing debts. Following literature on capital structure (Rajan and Zingales. Rajan and Zingales (1995) point out that in any studies that compare corporations’ financial data across countries. I obtained SR. High creditor right allows creditors more likely to obtain favorable contracting. Since firms involved in major mergers (cstat ¼ AB in Global Industrial file) have special capital structure (Aivazian et al. SR. I exclude financial firms (6999 . shareholders are likely to use less debt capital. III. and corporations with unconsolidated balance sheets appear to have underestimated financial leverage data than those with consolidated financial statements. To reduce bargaining power of creditor. I drop the following countries with less than 30 firm-year observations. (2008). negative sales revenue. such firms are dropped. respectively. Country-level data are collected from various resources. To comply with the requirements of time-series cross-sectional regression. bond market capitalization. I also drop firms with negative equity. and Romania. and labor rights (LR) indices. respectively. Table I lists data and variable information. I select firms with fully consolidated accounting statements only (consol ¼ F in Global Industrial file). 6000). CR. Data and methodologies 3. because expansion is harder to reverse later than it would be in a political environment that provides weak employee protection.. GDP growth rate. Kenya. the differences in accounting practices cause samples bias. in order to weaken bargaining power of employees.

Djankov and Shleifer (2007) use CR index to measure for country-level protection for creditors. respectively. 2000. I use two country-level variables. . whether secured creditors are able to gain possession of their security once the reorganization petition has been approved (no automatic stay).3 Downloaded by UNIVERSITAS TRISAKTI. 2006). such as creditor’s consent or minimum dividends to file for reorganization. (1997) SR index to make it more accurate. Data definitions. The SR is used as a control variable. Similar to SR index. Miss shellvida husniyah At 17:08 07 October 2014 (PT) 308 Abbr.663 unique firms over 52 countries during the period of 1990-2008. (2004) World Bank report Government quality index Ownership concentration index Private bond market capitalization/ GDP Annual GDP growth rate Kaufmann et al.182 firm-year observations from 21. measurements and sources Measurement Labor rights Stock market development GOV_QUAL Government quality OWNER_CON Ownership structure BDGDP Bond market development GDPG Economic development Inflation Inflation BKGDP Banking development COM Legal origin Labor union power index Stock market capitalization/GDP Source Global Industrial Global Industrial Global Issue Global Industrial Global Industrial Global Industrial Global Industrial file and file file file file Djankov et al. LLSV (1998) develop a SR index. (2008) Djankov and Shleifer (2007) Botero et al.. our sample contains 182. (2008) as a proxy for SR. CR and LR indices as proxies for the bargaining powers of creditors and employees. This SR index is widely used in literature (LLSV. whether a country imposes restrictions. secured creditors are ranked first in the distribution of the proceeds that result from the disposition of the assets of a bankrupt firm. .MF 38. and . (2007) LLSV (1998) World Bank report Annual inflation rate Domestic bank deposits/GDP World Bank report IMF Statistic report World Bank report LLSV (1998) Dummy variable equals one for common law origin countries and zero otherwise After applying these filters. (2008) update La Porta et al. The CR index is an accumulation of four dummy variables that check: . Panel A: firm-level variables Variable Debt Debt ratio Long-term debt/total assets MTB Market-to-book ratio (BV of total assets-BV of equity þ MV of equity)/total assets Profit Profitability EBITDA/total assets Cash Cash Cash balance/total assets Size Size Log of total assets in US dollars Tang Tangibility Tangible assets/total assets Panel B: country-level variables Proxy for SR Shareholder rights Anti-self-dealing index CR Creditor rights Creditor rights index LR Stock Market Table I. I use the updated anti-self-dealing index from Djankov et al. Pinkowitz et al. Djankov et al.

Myers.. (2) if employees have the rights to collective bargaining. and (7) if workers’ councils are mandated by law. Heckman and Pages-Serra. (3) if employees have the legal duty to bargain with unions. The labor union power is an average of seven dummy variables which equal one: (1) if employees have the rights to unionize. Miss shellvida husniyah At 17:08 07 October 2014 (PT) . or both. Studies on international capital structure test the different impact of firm-level factors and add country-level variables as explanatory variables. computed by long-term debt divided by total assets for firm i at year t (firm subscription is suppressed in equation (1)).2 Methodology and research design Studies on financial leverage based on the trade-off theory and the pecking order theory use the partial adjustment model to explore the optimal debt ratio (Harris and Raviv. Roe (2004) asserts that a marginal increase in benefits of employees would be a marginal decrease in shareholders’ value and that strong LR provided by legal and political systems in fact hurt a firm value. 3. Following Rajan and Zingales (1995) and Aivazian et al. have a right to appoint members to the Boards of Directors. 2003. (4) if collective contracts are extend to third parties bylaw.Downloaded by UNIVERSITAS TRISAKTI. (5) if the law allows closed shops. Agency costs of stakeholders 309 . Therefore. Those studies check the law and regulatory provisions on such aspects as the difficulty of firing employees. MTBt – the market-to-book ratio. 1990). I use the following model to examine the impact of creditor and employee rights on financing decisions across countries: Debtt ¼ a1 þ a2 MTBt þ a3 Profit t þ a4 CASH t þ a5 Sizet þ a6 Tang t þ a7 SR þ a8 CR þ a9 LR þ 1t ð1Þ Debtt – the long-term debt ratio. (6) if workers or unions. 2000. Lazear. whether the debtor does not retain the administration of its property pending the resolution of the reorganization. Botero et al. computed by the book value of total assets minus the book value of equity plus the market value of equity all divided by the book value of total assets for firm i at year t (firm subscription is suppressed in equation (1)). and the easiness of hiring employees and explore how employees’ benefits are affected due to the differences in those provisions. I use measures for LR as a proxy for bargaining power of employees. 1990. There is an extensive literature on the relationship between LR and law and regulation of labor (Besley and Burgess. 2001) whereas studies addressing agency problems use debt ratio to regress on firm-level determinants (Myers and Majluf. With regard to employees’ power to pursue maximum benefits. the costs of firing employees. (2004) use the labor union power index as a proxy for LR. 1984).

following up the literature on capital structure. The top-tier factors include firm size. I use the book value of total assets minus the book value . considering availability of data for cross-national comparison.. 2001. Tangt – the tangibility computed by tangible assets divided by total assets for firm i at year t (firm subscription is suppressed in equation (1)). SR – the SR index at country level. Firm-level variables are used as control variables. is computed by book value of long-term debt divided by book value of total assets for each firm i at year t. depreciation. Two country-level variables. Thus. Chen and Zhao. risk.3 Profit – computed by earnings before interest. Aivazian et al. As discussed in Section I. Chen and Zhao (2006) find that market-to-book ratio and profit are two key firm-level determinants of capital structure in various scenarios. The firm-level variables are selected based on capital structure theories. 2006) to measure for growth opportunities. Based on the capital structure theories. long-term debt ratio is a more reliable measure used to address agency problems. They argue that those are factors most consistently correlated with leverage in the literature. size. the book value of debt is a better measure of creditors’ liability in case of bankruptcy than market value of debt and that market value of debt has measurement problems due to the volatility of market price. Sizet Downloaded by UNIVERSITAS TRISAKTI. LR – the LR index at country level. average leverage in an industry. and tangibility. Miss shellvida husniyah At 17:08 07 October 2014 (PT) 310 – the log of total assets in US dollars for firm i at year t (firm subscription is suppressed in equation (1)). empirical research tests the impacts of various variables on financial leverage and interprets test results using one or another model. Therefore. I use long-term debt only as the dependent variable. Frank and Goyal (2005) argue that theoretically. the CR and LR indices are major explanatory variables to address research objectives. it is necessary to remove liabilities like accounts payable that is used for transactions purpose rather than for financing purpose. I choose to use the follow firm-level variables as control variables: market-to-book ratio. CR – the CR index at country level. Rajan and Zingales (1995) point out that to examine the agency problems associated with debt.MF 38. and amortization (EBITDA) divided by total assets for firm i at year t (firm subscription is suppressed in equation (1)). taxes. this is a research that focuses on the impact of country-specific characteristics on financing policy. firm size. Rajan and Zingales (1995) limit their firm-level control variables to four factors: tangibility of assets. I use two groups of independent variables in empirical tests: firm-level variables and country-level variables. To study capital structure in the international context. and market-to-book ratio. the market-to-book ratio. Following this logic. Frank and Goyal (2005) examine 39 factors relating to financial leverage and divide those factors into two tiers based on their reliability of relationships with leverage. The market-to-book ratio (MTB) is widely used in literature (Rajan and Zingales. 1995. Consistent with Rajan and Zingales (1995) and Frank and Goyal (2005). profit. Debt. and profitability. the dependent variable.

To test firm determinants of debt ratio.736 and 0. I run the regressions using industry segment data and pooled sample. the empirical results are consistent with the literature on international capital structure comparison (Rajan and Zingales. one needs to adjust to industry effect either by subtracting industry mean (Chui et al. 1995.5 percent and median is 12 percent. I run the fixed-effect regression using panel data as follows (firm subscription suppressed): Debt t ¼ a1 þ a2 MTBt þ a3 Profit t þ a4 CASH t þ a5 Sizet þ a6 Tang t þ 1t ð2Þ The variables are defined the same as in Section II.261 and 0. dividing sample groups based on industry segments first (Frank and Goyal. Aivazian et al. Stock price information is collected from Global Issue file. 4. Empirical results 4. common law countries have better shareholder protection than civil law countries because SR mean for common law and civil law countries is 0.1 Summary statistics I provide sample description and summary statistics in Tables II and III. implying that it is country-specific characteristics that cause variations in financial leverage across countries. 2005). 2002) or by using industry dummy variables. 5. Tang. instead. respectively. Profit is defined as the ratio of EBITDA to total assets. There are conflicting theoretical predictions and mixed empirical findings on the effect of size on leverage.340. Norway has the highest average debt ratio.377. Then I run the pooled sample using industry fix effect model. 23. IV. As predicted by the agency costs model and the pecking order model. Table V presents the regression results. Size is the log of total assets in US dollars.. Miss shellvida husniyah At 17:08 07 October 2014 (PT) of equity plus the market value of equity all divided by the book value of total assets to calculate the market-to-book ratio. The LR mean for common law and civil law countries is 0. All stock prices are currency exchange rate-adjusted. Both size and tangibility represent for corporations’ operating performance.Downloaded by UNIVERSITAS TRISAKTI. Table IV presents variables that describe country characteristics. respectively.13 percent. respectively. Profit is a proxy for internal finance capacity as the pecking order model suggests. Rajan and Zingales (1995) point out that firm size is usually regarded as a proxy both for information asymmetry and for the probability of bankruptcy. 2001).31 percent over the sample period.. I winsorize all firm-level variables at 5 percent level[2]. indicating that higher employee rights in civil countries. The significance of coefficients remains consistent. is computed by tangible assets divided by total assets. Here. the regression analysis on firm determinants of debt shows that those firm-level variables affect debt ratios across countries in a similar way. The sample mean of debt ratio is 12. Tangibility. These two proxies Agency costs of stakeholders 311 . Size is also used as a proxy for growth. I run regression using sub-samples. Market value of equity is computed by stock price multiplying number of shares outstanding. To address the outliers issue. showing that the correlation between debt ratio and firm-level factors is not driven by industry difference. Consistent with literature. I divide sample into two groups: common law and civil countries.2 Firm-level determinants of financial leverage I start analysis by running regression using firm-level variables only. As presented in the following section. whereas Morocco has the lowest debt ratio.

of obs No.324 1. Sample description Country Argentina Australia Austria Belgium Brazil Canada Switzerland Chile China Colombia Czech Republic Germany Denmark Egypt Spain Finland France UK Greece Hong Kong Hungary Indonesia India Ireland Israel Italy Japan Korea Sri Lanka Morocco Mexico Malaysia The Netherlands Norway New Zealand Pakistan Panama Peru Philippines Poland Portugal Russian Federation Singapore Slovak Republic Sweden Thailand Turkey Taiwan USA No.3 Downloaded by UNIVERSITAS TRISAKTI.473 3.499 15.196 6.890 0 1.783 3.006 1.350 (continued) .994 978 690 329 1.108 95 110 37 1.450 2.790 33 40 2.376 48 1.061 269 270 426 1.347 182 367 45 459 337 104 93 754 11. of obs Primary Manufacturing Advanced manufacturing Services Total 5 3.225 16.972 34.259 941 621 481 29 18 28 381 67 148 50 1.367 514 10 424 379 2.352 2.086 1.281 396 22 327 470 1.040 334 5.915 74 1.834 497 237 168 159 2 30 247 84 143 40 564 19 408 1. of obs No.005 529 347 75 85 13 41 152 92 86 21 1.068 219 305 433 1.153 7.239 201 313 257 3.814 40 32 787 6.496 167 1.855 199 272 60 810 394 168 100 509 6.045 762 6.523 1.451 215 8.558 44.067 1.476 784 998 1.238 762 0 19 151 2.924 36 43 241 0 12 176 77 0 186 39 324 1.078 278 800 56 580 242 300 130 568 14.034 89 967 8.396 750 293 33 159 992 288 438 139 4.332 91 0 0 91 825 119 191 26 20 0 60 212 45 61 28 258 13 174 165 11 185 2.583 95 57 6 145 5 118 6 141 2. of obs No.097 116 92 6.005 39 2.719 99 1.766 9.387 39 16 2.059 938 155 2.293 7 824 754 155 3.923 2.182 389 16 387 308 1.087 79 907 17.297 634 271 1.265 37 3.054 509 9 8 229 1. Miss shellvida husniyah At 17:08 07 October 2014 (PT) 312 Table II.863 754 1. of obs No.899 452 31 5 316 2.679 44 24 1.MF 38.170 437 293 1.

334 20 1. Miss shellvida husniyah At 17:08 07 October 2014 (PT) Venezuela South Africa Zimbabwe Total No. Gaud et al. I use variance inflation factor (VIF) and tolerance to diagnose multicollinearity problem. The analysis is implemented by running the pooled sample ordinary least square (OLS) regression with year and industry fixed effects.969 32 182.182 Notes: Primary industry: SIC: 0000-1999. I also estimate the regression model with the Newey-West standard error. Table VI presents the regression results..3 The impact of creditor and employee rights on financing policy Based on the conceptual framework and hypotheses developed in Section I. Robust clustering standard errors are estimated to control for interdependence across firms. The pooled sample fixed effects regression generates positive LR coefficients.297 32 228 0 55. Wooldridge (2002) defines the VIFs and tolerance as the following: VIF ðbi Þ ¼ 1=ð1 2 R2i Þ. The reference group is the agriculture industry group. While the results in table show that the firm-level determinants of capital structure across countries are consistent. Model (1) tests the impacts of CR and LR on debt ratio only whereas model (2) adds SR as an additional independent variable. Based on Campbell (1996) and LLSV (2000). The results stay statistically significant. firm clustering effects. The results are significant after controlling for firm-level factors. manufacturing industry: SIC: 2000-2999. CR.. However. and the compounded impacts of SR. given the variations in capital structure around the world (Aggarwal. of obs No. I turn to explore the relationship between creditor and employee rights and corporations financing policy across countries. Agency costs of stakeholders 313 Table II. and employee rights[4]. Aivazian et al. and Tolerance ðbi Þ ¼ 1=VIF ¼ 1 2 R2i where bi is the coefficients of model and R2i is the unadjusted R 2. statistically significant at 1 percent level. of obs No. 1990. of obs No. 4. . The coefficients of market-to-book ratios are negatively significant at 1 percent level in services industry segment and pooled sample. 2001. of obs No. advanced manufacturing industry: SIC: 3000-3999 services industry: SIC: 4000-9999 imply two inverse effects on leverage. To address the multicollinearity issue in OLS regression. it is necessary to explore the impact of country characteristics on capital structure across countries.Country Downloaded by UNIVERSITAS TRISAKTI. of obs Primary Manufacturing Advanced manufacturing Services Total 0 332 7 16.017 83 1.168 18 73. I introduce seven industry group dummies in cross-national regression to control for the industry effects[3]. To address the possible presence of heteroscedasticity and autocorrelation. coefficients of size are positively significant. and negative CR coefficients at 1 percent significant level.534 31 241 7 37. The H1 in Section I predicts the positive sign for LR and the negative sign for CR. 2007).

454 0.370 0.110 0.725 1.0956 0.1551 0.1244 0.516 5.831 0.167 1.495 0.117 5.063 0.292 0.1237 0.619 6.983 5.010 1.853 1.849 6.1172 0.168 6.108 0.081 0.201 7.567 0.118 0.265 0.599 7.269 0.568 0.456 4.467 0.993 4.1294 0.184 0.489 0.669 5.339 1.712 5.137 0.0609 0.0799 0.447 1.396 6.103 4.293 0.747 1.498 1.447 0.2021 0.225 1.1895 0.092 0.362 1.110 6.125 0.440 0.078 0.1544 0.417 1.914 5.1426 0.415 1.0794 0.0680 0.096 0.0531 0.128 1.1279 0.553 0.215 1.291 1.335 0.869 1.359 0.104 0.588 6.335 0.1117 0.334 0.059 1.538 1.687 1.567 6.348 0.180 0.726 4.083 0.0899 0.320 4.170 0.085 0.119 0.0855 0.458 0.0916 0.285 5.068 1.919 5.266 1.429 0.256 0.404 1.194 1.151 0.1213 0.1570 0.801 6.109 0.005 4.120 0.0992 0.079 0.896 1.348 1.420 1.808 5.3 Downloaded by UNIVERSITAS TRISAKTI.081 6.506 0.720 2.112 0.301 0.0769 0.391 0.MF 38.550 0.107 1.453 6.021 8.375 0.337 0.344 0.102 0.060 0.240 0.420 0.1993 0.1641 0.420 0.101 0.101 1.0869 0.538 4. Miss shellvida husniyah At 17:08 07 October 2014 (PT) 314 Table III.1465 0.374 0.1182 0.168 0.067 0.126 6.147 0.419 0.092 0.529 0.249 5.438 1.1261 (continued) .1690 0.200 0.133 0.621 8.323 0.1838 0.769 5.110 1.043 2.398 0.1224 0.408 0.1293 0.552 6.909 5.0984 0.105 0.337 0.0883 0.399 1.634 6.327 0.110 0.948 1.320 0.505 Debt 0.557 1.405 6.0968 0.817 4.1288 0.929 5.229 1.689 6.180 0.2031 0.695 5.131 0.587 1.256 1.111 0. Firm-level variables for analyses Country MTB Profit Size Tang Argentina Australia Austria Belgium Brazil Canada Switzerland Chile China Colombia Czech Republic Germany Denmark Egypt Spain Finland France UK Greece Hong Kong Hungary Indonesia India Ireland Israel Italy Japan Korea Sri Lanka Morocco Mexico Malaysia The Netherlands Norway New Zealand Pakistan Panama Peru Philippines Poland Portugal Russia Singapore Slovak Sweden Thailand Turkey Taiwan USA Venezuela 5.891 1.415 0.072 0.694 6.1156 0.1159 0.245 1.095 0.130 0.1127 0.257 1.405 5.126 0.849 6.1518 0.634 5.073 0.363 0.517 1.332 5.087 0.116 0.013 0.407 0.092 0.2313 0.321 0.1183 0.409 0.1709 0.731 5.098 0.1939 0.455 4.465 0.125 0.348 0.207 1.1780 0.078 0.917 5.371 1.899 0.0716 0.128 0.285 0.696 1.921 1.099 0.761 0.0949 0.654 4.243 0.

creditors have more power to negotiate with shareholders and corporations to obtain better terms in debt contract or can easily apply restrictions to corporations.664 1.210 1.069 5. Size is the log of total assets in US dollars. respectively. it is more likely that shareholders will use high financial leverage to mitigate agency costs of employees if such agency costs are caused by government law and regulatory regimes. Such restrictions might include the one that limits corporation to use excess debt.804 0. On the other side. and from 0.244 0. shareholders will seek a way within the corporation to protect them from exploiting by employees. the dependent variable Debt is the long-term debt ratio computed by long-term debt divided by total assets.701 5. The regression results reveal a positive relationship between LR and financial leverage level and a negative relationship between CR and the usage of debt financing.376 0. When I add SR index as an additional control variable.4 Robust check Regression analyses that use international sample are likely to generate biased results due to the sample selection bias and the model misspecification (omitting variable) bias. Using higher financial leverage to remove the free cash flow is one option shareholders can choose to achieve this goal.1080 0.375 0.334 0.0653 0.125 0.0506 in two estimations. the less debt the firm will use. these measures can be useful in identifying multicollinearity. which means that severe multicollinearity effects are present. In a country where CR are strong. This result also supports the H2. MTB is the market-to-book ratio computed by the book value of total assets minus the book value of equity plus the market value of equity all divided by the book value of total assets.387 0. the higher the variance of bi and the greater the chance of finding bi insignificant.0193 to 0. Thus. Since protections for employees are exogenous. Profit is computed by EBITDA divided by total assets. 4. Tang is the tangibility computed by tangible assets divided by total assets It is readily seen that the higher VIF or the lower the tolerance index. In robust tests. which says the stronger the CR.0185 to 0. The negative coefficient of CR suggests that CR affect corporations’ financing decisions differently than LR. Miss shellvida husniyah At 17:08 07 October 2014 (PT) Country MTB Profit Size Tang Debt South Africa Zimbabwe Sample mean Sample median 1.872 5. corporations and shareholders will choose to use less debt since it is harder to get a favorable debt contract if CR are strong. Table VII presents the test result and VIF does not show serious multicollinearity problem. the coefficients of LR stay positively and increase substantially.146 0.120 Notes: Sample period is 1990-2008. when employees get strong protection from high LR. Unlike employees. They increased from 0.416 0. I address the first issue by running the two-stage residual Agency costs of stakeholders 315 Table III. Such employees’ benefit gain is at expense of shareholders.Downloaded by UNIVERSITAS TRISAKTI.115 0.043.110 5. creditors involve in debt contracting directly. they more easily obtain benefits from corporations through union negotiation or government intervention.516 2. As discussed in Section I. The increased positive coefficients of LR in model (2) imply that in a country where SR are higher. .

070 0.284 0.1 0.037 2.06 0.945 0.39 1.55 1.589 1.73 5.28 0.87 1.865 0.353 0.023 0.450 0.606 0.722 0.063 0.284 7.59 3.4 0. Chui et al.3 0.81 2.07 4.42 2 0. SR.240 4.172 0.5 26.004 0.54 3.15 4.293 0.156 0.476 0.792 0.82 1.491 0.35 3.35 4.44 1 0.2 3 0.945 1.25 0.16 3.43 2 0.691 21.000 0.34 0.27 0. running pooled sample regression cannot totally remove the disturbance of firm-level variables. 2002.65 2 0.44 1.215 0.14 0.98 0.074 0.53 1.33 3 0.58 0.005 0.4 0. The pooled sample regressions have two limitations.074 0.455 0.714 1.16 3.228 0.176 7.4 1.19 0.86 3.667 0.068 3.322 1.040 0.28 0.710 0.74 3.145 0.274 1.415 2.18 3.38 0.159 0.16 4 0.046 0.315 0.358 0.5 3.18 1 0.570 0.870 2.335 9.42 2.05 3.29 2 0.316 0.08 1.22 1 0.6 0.189 1.565 8.63 0.144 0.26 0.565 0.012 0.339 0.385 0.340 0.64 4.29 1 0.694 3.37 1.223 0.1 20.078 0.61 1.57 0 0.36 0.88 1.64 4.150 4.5 1.451 3. .230 1.MF 38.014 0.310 1.378 0.41 2.891 0. Miss shellvida husniyah At 17:08 07 October 2014 (PT) 316 Table IV.489 4.416 0.44 0.150 0.99 2.447 0.7 2 0.429 45.13 2.091 0.716 0..28 3 0.44 2 0.12 0.41 1.618 2. and LR indices and country-level control variables Country Panel B: civil law Argentina Austria Belgium Brazil Switzerland Chile China Colombia Czech Republic Germany Denmark Egypt Spain Finland France Greece Hungary Indonesia Italy Japan Korea Morocco Mexico The Netherlands Norway Panama Peru Philippines Poland Portugal Russia Slovak Republic Sweden Turkey Taiwan Venezuela Civil law mean Civil law median Sample mean Sample median SR CR countries 0.33 0.192 0.45 1.33 0.779 4.159 0.605 0.05 0.763 1.81 20.76 2 0.282 0.38 5.698 0.220 4.188 0.787 3. Second.461 1.65 4.45 1.54 2 0.358 0.38 0 0.86 3.22 5.340 0.709 1.244 9.486 0.439 0.27 0.55 2 0.14 3.577 1.087 0.315 0.8 0.24 0.002 0.74 1.13 4.8 0.41 4.196 0.41 4.42 2 0.289 0.47 3 0.233 0.890 0.84 1.443 5.720 0.440 2.56 2 0.400 regression (Hoeffler.17 0 0.81 5.215 0. The major research objective of this paper is to examine the impacts of country-level CR and employee rights on financing across countries.13 5.063 5.24 5.45 1.487 1.95 1.742 2.42 3.020 0.099 0.27 1 0.024 0.46 1 0.12 0.716 0.83 1.9 0.013 0.144 0.314 1.87 9.46 3 0.64 1 20.43 1.220 0.712 0.41 20.063 31.12 0.159 1.312 0.32 0 1.4 0.45 0 0.48 2.66 0.94 1.728 1.65 1.439 0.56 1 0.5 0.726 3.17 3.280 0. First.52 1.626 1.84 0.377 1.79 1.34 1 0.429 0.27 1 0.895 0.52 0.09 0.330 2 0.11 20.5 2 0.316 0.15 0.75 3.58 3.449 0.278 0.12 0.936 2.195 0.215 0.710 0.389 0.3 Downloaded by UNIVERSITAS TRISAKTI.925 3. 2002) and overcome the second bias by including additional control variables.375 2.247 21.566 0.328 0.69 3.64 3.218 0.047 0.85 3.79 4.41 4. using firm-level variables as control variables.13 0.986 6.3 0.211 0.11 2 1.528 0.35 0.7 1.689 1.714 0.787 0.35 0.546 0.63 3.981 0.22 1.2 2 0.33 1 0.178 0.7 20.94 21.346 0.35 0.003 0.000 0.962 0. CR.172 0.25 0.06 1.21 0.902 0.57 4.465 0.270 Stock GOV_QUL ECO_GLB GDPG Inflation Bank Bond Market 20.63 2 0.945 1.853 12.13 0.31 1.946 0.7 1.446 0.000 0.300 0.738 0.12 0.06 0.37 2 0.22 1 0.44 5.000 0.16 4.424 1. including all countries in the sample results in unequal weights in sample.67 4.138 0.55 5.354 0.09 3 0.240 0.1 8.21 3 0.000 LR 0.8 2.721 0.745 0.86 1.477 0.

0279 * * * (39.0002 * * * (5.84) 0.1599 * * * (30. I construct an adjusted dependent variable by following method.75) 20.0947 * * * (13. of obs No.40) 55.503 0.2035 Notes: Significant at: *10.0699 * * (2.0709 2 0.14) 0.11) 0.13) 16. To overcome such limitations. I use the residual of this equation as the adjusted debt ratio. following Chui et al.0602 Pooled 2 0. and Japan have a much larger number of observations than other countries do.0955 * * * (17. (2002).03) 2 0.44) 20.28) 62.38) 37.58) 0. Firm and industry factors and financial leverage .0305 * * * (51.79) 20. the results cannot exclude the excess impact of those big countries.0279 * * * (26. * *5.1009 * * * (17.090 8.0001 * * * (2.0711 Agency costs of stakeholders Debt ratio Advanced manufacturing Services 6. First. absolute value of t-statistics in parentheses. in the second stage.286 20.943 0. In the first stage.0739 * * * (20.0000 (0.0001 (0. Britain. Miss shellvida husniyah At 17:08 07 October 2014 (PT) Size Tang Constant No.1774 * * * (23. the tstatistic reported in parentheses controls for firm clustering standard errors.181 22. of firms Adj.Primary MTB Profit Downloaded by UNIVERSITAS TRISAKTI. R 2 20.0685 * * * (15.01) 317 171.42) 20. the dependent variable Debt is the long-term debt ratio computed by longterm debt divided by total assets. Then. I calculate the mean of adjusted debt ratio for each country at each year and then use country mean of adjusted debt ratio as dependent variables to run the cross-national regression model: MeanAdjDebt t ¼ bX þ 1 X is the vector of country-level variables.64) 0. Tang is the tangibility computed by tangible assets divided by total assets Some countries such as the USA. ð4Þ Table V. After building the adjusted debt ratio for each firm at each year.1597 * * * (39.1557 * * * (38.16) 2 0.80) 20.0601 * * * (10.0704 Manufacturing 20. debt ratio for firm i at year t in county j is estimated by the following Default (firm and county subscription suppressed): Debtt ¼ a1 þ a2 MTBt þ a3 Profit t þ a4 Casht þ a5 Sizet þ a6 Tang t þ 1t ð3Þ The dependent and independent variables are defined the same as in Section II.0000 (0.613 0.07) 2 0.14) 0.354 0. Consequently.0588 * * * (12.64) 2 0. I use a two-stage regression model to remove the firm-level factors and to exclude the sample selection bias. * * *1 percent.0807 * * * (16.1458 * * * (28.0418 * * * (43.0230 * * * (53. MTB is the market-to-book ratio computed by the book value of total assets minus the book value of equity plus the market value of equity all divided by the book value of total assets.472 2.08) 0.593 0. this table presents the regression results of the following Default (with firm subscripts suppressed): Debt t ¼ a1 þ a2 MTBt þ a3 Profit t þ a4 Casht þ a5 Sizet þ a6 Tangt þ 1t sample period is 1990-2008. Size is the log of total assets in US dollars.59) 0.35) 0.333 4.24) 20.08) 0.1241 * * * (20. Profit is computed by EBITDA divided by total assets.

3 Debt ratio (1) MTB Downloaded by UNIVERSITAS TRISAKTI.28 1. SR and CR are shareholder rights and creditor rights from Djankov et al.0473 * * * (8.79) 0. robust t-statistics in parentheses.0228 * * * (26.28) 20.36) 0.55) Profit 318 (2) 20. sample period is 1990-2008.0167 * * * (24.0620 * * * (12. MTB is the market-tobook ratio computed by the book value of total assets minus the book value of equity plus the market value of equity all divided by the book value of total assets. Tang is the tangibility computed by tangible assets divided by total assets.25) 2 0.74) 20.150 0. (2008) and Djankov et al.3694 0.150 0. Miss shellvida husniyah At 17:08 07 October 2014 (PT) 2 0.78) 0.2240 (6.40) 2 0.96) 0. (2007). After removing firm-level factors totally and controlling for sample selection bias through two-stage regression. Variance inflation factors where model (1) tests the impact of CR and LR on debt ratio and model (2) test the compounded impact of SR.90) 2 0.0002 * * * (5. Size is the log of total assets in US dollars.59 1. (2004) Variable VIF Tolerance R2 SR CR LR Mean VIF 1. I run the robust tests by adding additional country-level controlling variables and re-run the two-stage regression.94) 171. respectively. * *5.0631 * * * (12.0804 * (1.0445 (1.06) 0.1632 * * * (40.6515 0.7826 0.16) 171. R 2 Notes: Significant at: *10. the t-statistic reported in parentheses controls for firm clustering standard errors. and labor right on debt ratio.3485 0. of obs Adj.01) 20. LR is the labor rights from Botero et al. Following the prior research. the dependent variable Debt is the long-term debt ratio computed by long-term debt divided by total assets.6306 0. To address the omitting variable issue. * * *1 percent. I add both country-level corporate governance quality variables such as government quality index and ownership concentration index and economic variables .0586 * * * (14.47 0. the tests results stay statistically significant. creditor right.2192 LR CR Constant No.0185 * * * (3.MF 38.2174 The two-stage regression results are presented in Table VIII. Profit is computed by EBITDA divided by total assets.1609 * * * (40. this table presents the regression results of the following Default (with firm subscripts suppressed): Debt t ¼ a1 þ a2 MTBt þ a3 PROFIT t þ a4 CASH t þ a5 SIZE t þ a6 Tang t þ a7 SR þ a8 CR þ a9 LR þ 1t Table VI.07) 0.0002 * * * Size Tang SR 0.0212 * * * (49. Impacts of CR and LR on financial leverage Table VII.0221 * * * (50.53 1.

The regression results are reported in Table IX.27) 814 0.0005 (0.Common law countries 0. Size is the log of total assets in US dollars. These significant results support the hypotheses.57) 2 0. The above robust tests results show that the coefficients of major target variables: CR and LR.96) CR LR Downloaded by UNIVERSITAS TRISAKTI. Conclusion This paper explores the relationship between CR as well as employee rights and capital structure across countries.0136 * * * (3.0421 * * * SR (5.0126 * * * (2.06) 20.94) 0.70) 0.01) 830 0.0162 * * * (3. (2004).0055 * * * (2.25) 2 0. Tang is the tangibility computed by tangible assets divided by total assets.0474 * * * (3. respectively.87) 0.0055 * * * (2.0450 * * * (8. V.55) 2 0. * * *1 percent. bond market development measure.77) 814 0. GOV_QUAL is the regulation quality of government.0224 * * * 0. Country-level corporate governance factors and debt ratio .0455 * * * (3. SR and CR are shareholder rights and creditor rights from Djankov et al.0038 * * (2.0321 * * * (2. (2007).1244 (2.0987 Full sample Full sample 0. and banking section development measure.14) 20.0001 * (1.0530 * * * (5.1130 0.12) 0. ECO_GLB is the economic globalization index from World Bank.0019 (0.1144 Agency costs of stakeholders 319 Notes: Significant at: *10. Profit is computed by EBITDA divided by total assets.13) 0. the dependent variable. Specifically.65) 814 0. sample period is 1990-2008 such as GDP growth rate. Table VIII.0002 (0. (2008) and Djankov and Shleifer (2007). MTB is the market-to-book ratio computed by the book value of total assets minus the book value of equity plus the market value of equity all divided by the book value of total assets.89) 0. robust t-statistics in parentheses.0000 (0. * *5. the t-statistic reported in parentheses controls for county clustering standard errors.06) 2 0.88) 0.94) 0. obtained from Kaufmann et al. the stock market capitalization to GDP.0293 * * (2. of obs R2 20.0324 * * * (2. stay statistically significant. The results reveal the impacts of bargaining powers of creditors and employees on capital structure given a country’s legal and political framework. LR have a positive relationship with debt ratio whereas CR have a negative relationship with debt ratio.0001 * (1.83) 2 0.92) 2 0.99) 0. STKGDP. is from World Bank.0306 * * * (3. this table presents the regression results of the following model: MeanAdjDebt t ¼ bX þ 1 where X is a vector of country-level variables. Miss shellvida husniyah At 17:08 07 October 2014 (PT) MeanAdjDebt Civil law countries STKGDP GOV_QUAL ECO_GLB Constant No. MeanAdjDebt. is the country mean of residuals of the following model (with firm subscription suppressed): Debtt ¼ a1 þ a2 MTBt þ a3 Profit t þ a4 Casht þ a5 Sizet þ a6 Tang t þ 1t where Debt is the long-term debt ratio computed by long-term debt divided by total assets.0239 * * (2.92) 20. LR is the labor rights from Botero et al.

77) 746 0. Inflation is the inflation rate.MF 38.69) 20.0190 * * * (4.0098 * * * (2.0069 * * * (3. LR is the labor rights from Botero et al. SR and CR are shareholder rights and creditor rights from Djankov et al.0119 * * * (5. MeanAdjDebt. is from World Bank. * * *1 percent. this table presents the regression results of the following model: MeanAdjDebt t ¼ bX þ 1 where X is a vector of country-level variables. obtained from Kaufmann et al.24) 0. ECO_GLB is the economic globalization index from World Bank. (2007). STKGDP.0002 (0.0714 * * * (4. the stock market capitalization to GDP.90) 0.25) 746 0. GOV_QUAL is the regulation quality of government. GDPG is the GDP growth rate. (2004).05) 0. Country-level economic factors and debt ratio where Debt is the long-term debt ratio computed by long-term debt divided by total assets. Profit is computed by EBITDA divided by total assets.54) 20.0005 (0.10) 0.0117 * * * (4.86) 2 0.03) 0.0088 * * (2. the dependent variable.95) 0. (2008) and Djankov and Shleifer (2007).55) 20.0431 * * * (3. * *5. robust t-statistics in parentheses.0076 * * * (3. MTB is the market-to-book ratio computed by the book value of total assets minus the book value of equity plus the market value of equity all divided by the book value of total assets.0631 * * * (8.0465 * * * (7. is the country mean of residuals of the following model (with firm subscription suppressed): Debtt ¼ a1 þ a2 MTBt þ a3 Profit t þ a4 Casht þ a5 Sizet þ a6 Tang t þ 1t Table IX.10) 2 0.0234 * * * (5.0375 * * * (4.0470 * * * (3.0063 (1.2504 (2) 0. Miss shellvida husniyah At 17:08 07 October 2014 (PT) STKGDP Bond Bank SR CR LR 0.14) 2 0. Size is the log of total assets in US dollars. respectively. Bank is the domestic bank deposits to GDP. the t-statistic reported in parentheses controls for county clustering standard errors.14) GOV_QUAL ECO_GLB Constant Observations R2 20.3 MeanAdjDebt (1) GDPG 320 Inflation Downloaded by UNIVERSITAS TRISAKTI.96) 2 0.0505 * * * (6. sample period is 1990-2008 .80) 0.0452 * * * (4.27) 0.55) 0. Bond is the private bond capitalization to GDP. Tang is the tangibility computed by tangible assets divided by total assets.2523 Notes: Significant at: *10.

shareholders are more likely to be exploited by employees. These results should be of interest to managers. As a result. The Quarterly Journal of Economics. V. If so. Booth. creditors. (3) construction. The tests results do not change qualitatively. Using country-level CR index and LR index as a proxy for bargaining powers of creditors and employees. Since Tobit model cannot generate robust standard errors. shareholders intend to use more debt obligation to remove free cash flows to reduce employees’ opportunities to obtain more benefits from the firm. (4) light manufacturing. T. and employees have heterogeneous utility functions. Studies on international capital structure include Aggarwal (1990). References Acharya. and a series of country-level control variables. 119. 3. we also use Tobit model to regress debt ratio on the same firm-level independent variables. This is because when employee rights are high. pp. I find a positive correlation between employee rights and firms’ use of debt and a negative correlation between CR and firm debt ratio. R. Besley. and (7) services. pp.. and LR indices with year and industry fixed effect. (2007). L. we report our results based on OLS regression. R. (2) mining.Downloaded by UNIVERSITAS TRISAKTI.. among others. investors. When stakeholders other than shareholders pursue to maximize their benefits and interests within corporations. (2003). “Capital structures in developing countries”. CR. and Litov. the SR. Journal of Finance. respectively. 91-134. 2. communications and utilities. 56. Vol. (2011). Miss shellvida husniyah At 17:08 07 October 2014 (PT) In corporate governance context. shareholders stand on the one side of the game whereas other stakeholders stand on the other side. and Maksimovic. 39-53. Amihud. pp. making debt less attractive to shareholders. Aivazian. When CR are high. (1990). The empirical results are robust by controlling for sample selection bias. 4. A. NYU working paper. V. Aivazian et al. test model specification. I also used 1 percent winsorized sample and original sample to run all tests. Demirguc-Kunt. (6) transportation. stakeholders such as shareholders. This is the essential of interaction between stakeholders. “Creditor rights and corporate risk-taking”. Rajan and Zingales (1995). Since debt ratio is censored by zero at lower bound. (5) heavy manufacturing. Notes 1. Agency costs of stakeholders 321 . V. (2001) and Gaud et al. LLSV (2000) classify non-financial firms into seven broad industrial groups: (1) agriculture. “Capital structure differences among large Asian companies”. 87-130. L. As firm residual claimants. The results obtained from this paper helps us to understand financial leverage in different countries with various corporate governance mechanisms and fills significant gaps in the literature on international financing policy. The coefficients of CR and LR stay significant statistically with the expected sign. their gains are at the expense of shareholders.. ASEAN Economic Bulletin. and policymakers. and Burgess. Aggarwal. Vol. (2001). Y. a game is played among those stakeholders within a country’s legal and political framework.V. “Can labor regulation hinder economic performance? Evidence from India”. creditors have more negotiation power to obtain good terms in debt contracting. Vol. 7.

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“Control rights and capital structure: an empirical investigation”. stock market development. 17. W. industrial structure. 315-41. and Volpin.MF 38. Journal of Financial and Quantitative Analysis. and ownership structure”.J. 1005-30. and Kraakman. 305-60. M. Journal of Finance. Roberts. pp. M. and Zingales. Oxford. Raleigh. and Volpin. (2005). Cambridge. (1976). pp. Meredith College. Vol. (1999). Pagano. North Carolina. Journal of European Economic Association. Vol. Roe. Oxford Review of Economic Policy. 471-517. Rajan. pp. Jensen.emeraldinsight. (2009). 54. About the author Dr Bing Yu is an Assistant Professor of Finance at the School of Business. and Meckling. M. pp. A. pp. Lopez-de-Silanes. “The political economy of corporate governance”. R. and politics”. 64. Vol.. and Sufi. R. and Vishny. La Porta. “Financial systems. Oxford University Press. and growth”. Vol. L. P. Journal of Finance. (2005).com Or visit our web site for further details: www. Corporate Governance: Political and Legal Perspectives. H. 1657-95. “Theory of the firm: managerial behavior agency costs. 95. and Roe. M. in Gordon.edu To purchase reprints of this article please e-mail: reprints@emeraldinsight. (2006). R. 4.3 Downloaded by UNIVERSITAS TRISAKTI. (2001).W. J. (Eds). M. “Shareholder protection. “The end of history for corporate law”. Vol. A. Miss shellvida husniyah At 17:08 07 October 2014 (PT) 324 Hansmann.. 3.com/reprints . Convergence and Persistence in Corporate Governance. Vol. 467-82. Pagano. Shleifer. (2004). pp. F. Cambridge University Press. P. R. “Corporate ownership around the world”. USA. American Economic Review. Bing Yu can be contacted at: yubing@meredith. M.

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