Employee representation and financial leverage

Chen Lin, Thomas Schmid, Yuhai Xuan

Research output: Contribution to journalArticlepeer-review


We analyze how direct employee voice affects financial leverage. German law mandates that firms’ supervisory boards consist of an equal number of employees’ and owners’ representatives. This requirement, however, applies only to firms with more than two thousand domestic employees. We exploit this discontinuity and the law's introduction in 1976 for identification and find that direct employee power increases financial leverage. This is explained by a supply side effect: as banks’ interests are similar to those of employees, higher employee power reduces agency conflicts with debt providers, leading to better financing conditions. These findings reveal a novel mechanism of direct employee influence.

Original languageEnglish (US)
Pages (from-to)303-324
Number of pages22
JournalJournal of Financial Economics
Issue number2
StatePublished - Feb 2018


  • Bank ownership
  • Capital structure
  • Employee representation
  • Financial leverage
  • Labor rights

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics
  • Strategy and Management


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