When Employees have their Say on Capital Structure: Evidence from a Quasi-natural Experiment

María Gutiérrez Urtiaga (Universidad Carlos III de Madrid)
Antonio Vázquez (Stockholm School of Economics)
Sofía Matínez (University of Michigan)


We examine changes in the capital structure of small private firms when employees are granted decision rights through representation on the board of directors.
Swedish law grants employees the right to have representatives on the board of directors when the firm has more than 25 employees. We exploit this discontinuity using
firm-level data on small Swedish private firms and find evidence that employee representation at the board level results in significant decreases in the debt-to-equity ratio.
Nevertheless, employee representatives are a minority of the board and have limited
voting power. Therefore, we argue that the increase in bargaining power necessary to
alter the capital structure of the firm comes from unions having access to additional
information provided by the employee board representatives. The stronger effects
for the subset of firms where information asymmetries between the firm and the employees are more severe is consistent with the information channel mechanism.

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