This paper examines relationship between bargaining powers of creditors as well as employees and financial leverage across countries. The purpose of this paper is to explore roles of creditors and employees in capital structure decisions under different legal and political regimes across countries.
Using country‐level creditor rights index and labor rights index as a proxy for bargaining powers of creditors and employees, respectively, the author addresses the interaction between creditors as well as employees and shareholders. The paper tests the impact of employee rights and creditor rights on capital structure across countries.
The author finds a positive relationship between employee rights and firms' use of debt and a negative relationship between creditor rights and firm debt ratio.
The paper provides a new perspective to interpret international variation in financial leverage in the world. The results obtained from this paper help us to understand financial leverage in different countries with various corporate governance mechanisms.
This paper takes all stakeholders into account when studying agency problems; it explores the role of creditors and employees in financing decision making under various corporate governance patterns and political and legal systems across countries.
