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| Author: | Rosett, J. |
| Title: | Labour leverage, equity risk and corporate policy choice |
| Journal: | European Accounting Review
2003 : VOL. 12:4, p. 699-732 |
| Index terms: | Finance Disclosure Executives Labour Stocks Policy Equities Risk |
| Language: | eng |
| Abstract: | This paper investigates the role of labour utilization in assessing equity investment risk and corporate financial policy choices. Several existing models of the firm predict that labour utilization is costly to adjust in the short run. It is argued in the paper that this leads to a relatively fixed obligation to pay cash to labour, in effect creating an off-balance-sheet intangible liability similar to a lease. The liability creates 'labour leverage' risk, analogous to financial leverage risk. Labour leverage is hypothesized to be positively correlated with equity investment risk as measured by characteristics of stock returns. Managers recognize this risk and adjust financial policies. The main empirical results are that labour leverage is positively correlated with equity investment risk, and it plays the predicted role in regressions explaining financial structure and dividend policy. Proxies for labour leverage are simple measures based on existing disclosure. |
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