We examine how parity employee representation (PER) on corporate boards affects firms’ capital investments. In Germany, PER is legally mandated for firms with more than 2,000 domestic employees, but not for those below this threshold. Exploiting this discontinuity, we show that PER has heterogeneous effects on firms operating in diverse environments. For firms experiencing positive growth, PER increases their responsiveness to investment opportunities, suggesting that employee participation increases firms’ ability to exploit growth options. The effect through growth options is particularly salient in situations in which growth options are highly valuable. In contrast, for firms experiencing negative growth, PER reduces investment responsiveness, suggesting that employees resist the exercise of abandonment options. This effect is more pronounced in firms with high labor intensity, in which employees are likely to have a strong voice. Furthermore, operational risk moderates the effects of employee representation––the positive effect through growth options is attenuated in high-risk firms and the negative effect through abandonment options is exacerbated, thereby suggesting that employee board representatives are less interested in pursuing growth where businesses are relatively risky, and they protect their constituents more forcefully in high-risk environments. Moreover, the positive effect of PER on exploiting growth options is attenuated by collective bargaining agreements, while its effect through abandonment options is little affected. Evidence from stock price behavior further supports the viewpoint that employee representation affects capital investment. Our findings are relevant to policymakers as well as to firms’ various stakeholders.
3917 7766
KK 827
- Doctorate, Technische Universität München
- Diploma, Technische Universität München
Thomas Schmid is an Associate Professor of Finance at the University of Hong Kong. Prior to his current role, he worked as a Post-Doctoral Researcher at the Technical University of Munich. His primary research focus is empirical corporate finance, with special interests in energy finance, climate finance, and corporate governance. His work has been published in various prestigious journals, including the Review of Financial Studies, the Journal of Financial Economics, the Journal of Accounting and Economics, Management Science, and Research Policy. Please refer to www.thomasschmid.org for his CV and more details.
Empirical Corporate Finance, with a focus on Corporate Governance, Labor Rights, and Product Markets
- “Employee Board Representation and Capital Investment,”
(with Qinglu Jin, Hui Ma and Guochang Zhang). Management Science, forthcoming. - “Employee Representation and the Manager-to-Worker Pay Ratio,”
(with Chen Lin and Yang Sun). The Review of Corporate Finance Studies, forthcoming. - “Female Directors and Firm Value: New Evidence from Directors’ Deaths,”
(with Daniel Urban). Management Science, 2023, 69(4), 2449-2473. - “Product Price Risk and Liquidity Management: Evidence from the Electricity Industry,”
(with Chen Lin and Michael S. Weisbach). Management Science, 2021, 67(4), 2519-2540. - “Is Skin in the Game a Game Changer? Evidence from Mandatory Changes of D&O Insurance Policies,”
(with Chen Lin, Micah S. Officer and Hong Zou). Journal of Accounting and Economics, 2019, 68(1), 101225. - “Employee Representation and Financial Leverage,”
(with Chen Lin and Yuhai Xuan). Journal of Financial Economics, 2018, 127(2), 303-324. - “Production Flexibility, Product Markets, and Capital Structure Decisions,”
(with Sebastian J. Reinartz). The Review of Financial Studies, 2016, 29(6), 1501-1548. - “Control Considerations, Creditor Monitoring, and the Capital Structure of Family Firms,”
Journal of Banking and Finance, 2013, 37(2), 257-272.
Product price risk is a potentially important factor for firms’ liquidity management. A natural place to evaluate the impact of this risk on liquidity management is the electricity industry, because producing firms face substantial price volatility in wholesale markets. Empirically, higher volatility of electricity prices leads to an increase in cash holdings, and this effect is robust to instrumenting for price risk using weather volatility. Cash increases more with price risk in firms using inflexible production technologies and those that cannot easily hedge electricity prices, indicating that operating flexibility and hedging are substitutes for liquidity management.