Effects of the Asian financial crisis on the relation between leverage and employee compensation

ABSTRACT

This study investigates the effect of the Asian financial crisis on the relation between leverage and employee compensation. We find a negative relationship between a firm’s debt ratio and employee compensation. We also show that this negative relation becomes evident since the Asian crisis. As an additional analysis, our findings also suggest that the negative relation between leverage and wages is particularly strong among small and risky firms.

RESUMEN

Este estudio investiga el efecto de la crisis financiera asiática en la relación entre el apalancamiento y la compensación de los empleados. Encontramos una relación negativa entre el índice de deuda de una empresa y la compensación de los empleados. También demostramos que esta relación negativa se hace evidente desde la crisis asiática. Como un análisis adicional, nuestros hallazgos también sugieren que la relación negativa entre el apalancamiento y los salarios es particularmente fuerte entre las empresas pequeñas y arriesgadas.

KEYWORDS:

• Asian financial crisis
• corporate finance
• emerging market
• employee compensation
• leverage

PALABRAS CLAVE:

• Crisis financiera asiática
• Finanzas corporativas
• mercado emergente
• compensación de los empleados
• apalancamiento

JEL CLASSIFICATION:

• G30
• G32
• J31
• J63

Acknowledgements

The authors are grateful for the helpful comments and suggestions from two anonymous referees, Ki Beom Binh, Seik Kim, and Doowon Ryu.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. Average unemployment in Korea was 3.4% between 1981 and 2012, 5.3% between 1997 and 2000, and 3.3% between 2001 and 2012.

2. Chaebol-affiliated firms have strong internal financing channels. Thus, it is widely believed that such firms are stable and rarely go bankrupt (Baek, Kang, & Lee, 2006; Ryu, Ryu, & Hwang, 2017).

3. Figure 2.3 in page 32 of Bieler et al. (2008) shows the trend of the ratio of irregular (temporary) workers during the period from 1989 to 2005.

4. http://www.kellogg.northwestern.edu/faculty/petersen/htm/papers/se/se_programming.htm.

5. Chen and Chen (2016) study the relation between the unemployment rate and financial development. Yildirim and Dal (2016) also investigate the effect of social transfer on labour force participation.

6. Lee and Kim (2015) run the regression with the HAZARD model based on Korean data. Thus, we follow the research to determine the coefficient of the HAZARD model.

7. Blueschke, Weyerstrass, and Neck (2016) study the crisis in Slovenia.

Additional information

Funding

This work was supported by the National Research Foundation of Korea Grant funded by the Korean Government [NRF-2013S1A5A2A03045406].