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CEO Inside Debt and Employee Workplace Safety

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Abstract

Theoretical studies suggest that, when determining the workplace safety level, CEOs face a trade-off between ex ante safety-improving expenditures and the expected losses due to ex post injury and illness occurrences. We examine whether firms with higher CEO inside debt holdings have safer workplaces. Using establishment-level employee workplace injury and illness data, we find that CEOs’ inside debt holdings are negatively associated with employee workplace injury and illness cases. This relationship is more pronounced if workers’ compensation premiums are more sensitive to injury claims and for firms with more government business and less pronounced for firms with higher levels of secured debt. We provide some evidence that our main result stems from CEOs increasing safety investments. Our empirical results are shown to be robust under a batch of robustness tests and when considering potential endogeneity problems. Our findings suggest that CEOs with higher levels of inside debt holdings are more sensitive to wealth loss due to employee injury and illness, leading to a safer workplace.

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Notes

  1. Theoretical research suggests that a CEO’s decision to achieve the optimal workplace safety level is essentially a trade-off between ex ante safety-improving costs and the expected losses of ex post injury and illness occurrences (e.g., Hallowell, 2011; Ma et al., 2016). Higher expected injury and illness losses will incentivize CEOs to undertake more actions to improve workplace safety (e.g., Hallowell, 2011; Ma et al., 2016).

  2. An establishment is a distinct physical operating location of a firm, such as a factory or a store. One firm can have multiple establishments.

  3. For example, a high rate of worker injury in Tesla’s plant has attracted the attention of regulators and the media. A labor group has stated that the Tesla plant’s rate of worker injury is higher than the industry average. Source: Forbes News. https://www.forbes.com/sites/alanohnsman/2017/05/24/labor-group-says-tesla-plant-has-31-higher-injury-rate-than-average/#2534de433ba6.

  4. A table linking Compustat’s GVKEY with establishment names in the OSHA workplace injury dataset can be found at https://sites.google.com/view/bugraozel/data.

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Acknowledgements

We thank Steven Dellaportas (editor) and two anonymous referees for their valuable feedback. We also thank Yubin Li, Xiaohui Qu, Rengong Zhang and the seminar participants at Harbin Institute of Technology, Shenzhen and China Development Economics Annual Meeting for their helpful comments.

Funding

Xuan Wu acknowledges financial support from Shenzhen Key Research Base of Humanities and Social Sciences (Grant Number: KP191002), Shenzhen Peacock Talents Start-up Fund and The Special Fund for Humanities and Social Sciences Developments of Harbin Institute of Technology, Shenzhen (Grant Number: XIAO20210004).

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Authors and Affiliations

  1. School of Economics and Management, Harbin Institute of Technology, Shenzhen, Shenzhen, China

    Xuan Wu

  2. Department of Accountancy, City University of Hong Kong, Kowloon, Hong Kong

    Yangxin Yu

  3. Postdoctoral Innovation & Practice Base, Shenzhen Investment Holdings Co., Ltd., Shenzhen, China

    Yueting Li

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Correspondence to Yangxin Yu.

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Appendix

Appendix

Variable

Definition

Variable definitions

SumCases

The total number of all employee injury and illness cases that result in death, days away from work, job transfers or restrictions and other recordable cases

InsideDebt

The natural logarithm of one plus the ratio of the CEO’s debt-to-equity ratio to the firm’s debt-to-equity ratio (e.g., Chi et al., 2017; Shen & Zhang, 2020)

Hours_Emp

The total number of hours per year (in thousands) worked in each establishment divided by the number of employees

EstSize

The natural logarithm of the average number of employees working at the establishment

Strike

An indicator variable that equals 1 if there was a strike or a lockout in the establishment during the year, and 0 otherwise

Shutdown

An indicator variable that equals 1 in the case of a shutdown or layoffs in the establishment during the year, and 0 otherwise

Seasonal

An indicator variable that equals 1 if the establishment employs seasonal workers, and 0 otherwise

Disaster

An indicator variable that equals 1 if the establishment is affected by adverse weather conditions or natural disasters during the year, and 0 otherwise

LnAssets

The natural logarithm of the firm’s beginning-of-year total assets

Lev

The firm’s beginning-of-year total short-term and long-term debt divided by total assets

PPE

The firm’s beginning-of-year net property, plant, and equipment divided by total assets

MtB

The sum of the firm’s beginning-of-year market value of assets, total liabilities, preferred stock and − 1 multiplied by the net deferred tax liability divided by the book value of assets

Turnover

The firm’s current year sales divided by beginning-of-year total assets

CapEx

The firm’s current year capital expenditures divided by beginning-of-year total assets

Cash

The firm’s beginning-of-year cash and cash equivalents divided by total assets

FCF

The firm’s current year income before extraordinary items plus depreciation and amortization expenses divided by beginning-of-year total assets

Tenure

The natural logarithm of the number of years the CEO has occupied the CEO position

Age

The natural logarithm of the CEO’s age

Female

An indicator variable that equals 1 if the CEO is female, and 0 otherwise

Duality

An indicator variable that equals 1 if the CEO is the chairperson of the firm, and 0 otherwise

Comp

An indicator variable equal to 1 if the state-mandated workers’ compensation premium for injuries or illnesses of the given establishment is in the top quartile of the sample, and 0 otherwise. The workers’ compensation premium ranking data are from the State of Oregon’s Department of Consumer and Business Services

GovC

An indicator variable equal to 1 if the value of the firm’s government contracts is in the top quartile of the sample, and 0 otherwise. The government contract data are obtained from the USAspending.gov

Secured

An indicator variable equal to 1 if the ratio of secured debt to total debt is in the top quartile of the sample, and 0 otherwise. Secured debt data is from Capital IQ

DART

The number of injury and illness cases with job transfers or restrictions and cases with days away from work divided by the number of hours worked by all employees in the establishment and multiplied by 200,000

DAFWII

The number of injury and illness cases with days away from work divided by the number of hours worked by all employees in the establishment and multiplied by 200,000

TCR

The total number of employee injury and illness cases (SumCases) divided by the number of hours worked by all employees in the establishment and multiplied by 200,000

INJURY

The total number of employee injury and illness cases (SumCases) divided by the number of employees in the establishment

InsideDebt_D

An indicator variable that equals 1 if the value of InsideDebt is above its median, and 0 otherwise

RInsideDebt

The natural logarithm of the CEO’s relative incentive ratio developed by Wei and Yermack (2011). This ratio is defined as the value change in the CEO’s inside debt divided by inside equity claims associated with a one-dollar increase in the value of the firm, scaled by the value change in the company’s external debt divided by external equity associated with the same one-dollar increase in the value of the firm

STR

The personal income tax rate of the state in which the firm’s headquarters is located

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Wu, X., Li, Y. & Yu, Y. CEO Inside Debt and Employee Workplace Safety. J Bus Ethics 182, 159–175 (2023). https://doi.org/10.1007/s10551-021-05033-6

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