Employee Treatment and Bank Default Risk during the Credit Crisis
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Employee Treatment and Bank Default Risk during the Credit Crisis Tu Nguyen 1 & Sandy Suardi 2
& Jing Zhao
3
Received: 3 July 2019 / Revised: 8 August 2020 / Accepted: 13 August 2020 # Springer Science+Business Media, LLC, part of Springer Nature 2020
Abstract
We examine whether banks’ interest in the well-being of their workforce, measured by an index of employee relations strengths, explains their default risk during the recent credit crisis. Using a sample of 179 U.S. banks, we find that banks with greater pre-crisis employee relations strengths experience lower default risk and have higher excess returns during the crisis. These banks have lower asset volatility and leverage, suggesting that bank default risk is mitigated through lowering operational and financial risks. Banks’ prudent risk-taking behavior benefits shareholders in times of heightened risk. The results are robust to alternative model specifications and endogeneity issues. Keywords Employee relations strengths . Stakeholder governance orientation . Credit crisis . Bank default risk JEL classification G01 . G21 . G30 . M51
Electronic supplementary material The online version of this article (https://doi.org/10.1007/s10693-02000343-8) contains supplementary material, which is available to authorized users.
* Sandy Suardi [email protected] Tu Nguyen [email protected] Jing Zhao [email protected]
1
Department of Accountancy and Finance, University of Otago, Dunedin, New Zealand
2
School of Accounting, Economics and Finance, University of Wollongong, Wollongong, NSW 2522, Australia
3
Department of Economics and Finance, La Trobe University, Bundoora, Australia
Journal of Financial Services Research
1 Introduction Practitioners and academics alike increasingly perceive human capital as playing an important role in modern firms (Zingales 2000). Investment in human capital, therefore, has never been more crucial to organizational success and sustainable competitive advantage. For nonfinancial firms, prior studies reveal that positive employee treatment schemes are associated with lower probability of bankruptcy, lower leverage and better stock return performance and firm value (Jiao 2010; Verwijmeren and Derwall 2010; Bae et al. 2011; Edmans 2011). However, empirical evidence remains lacking for financial institutions, despite McKinsey & Company’s advocacy for the importance of employees in bank risk functions (Härle et al. 2015). Our paper attempts to fill this gap. Specifically, in view of the significant threat that bank failures pose to financial stability, we investigate the relationship between banks’ investment in human capital, as reflected in employee relations strengths, and bank default risk during the recent credit crisis. To understand the link between banks’ employee treatment and their default risk, we turn to two competing models of corporate governance that have contrasting implications for bank risk-taking and bank default risk. Under shareholder governance orientation, the objective function of bank directors an
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