Evidence from North America. Xiangmin ... The study draws on a sample of 293 call center ... capacity of managers to adopt employment practices that enhance the quality of jobs (Gospel ...... Working Paper 2007-48, Ottawa: Bank of Canada.
0
Does the Structure of Ownership Affect the Quality of Jobs? Evidence from North America
Xiangmin Liu Pennsylvania State U.
Rosemary Batt Cornell U. Danielle van Jaarsveld U. of British Columbia
Ann Frost U. of Western Ontario
Paper submitted to the 2012 Industry Studies Conference Pittsburg, PA May 29-May 31
*Comments are welcome. Please do not cite.
1
Does the Structure of Ownership Affect the Quality of Jobs? Evidence from North America A growing body of research has identified a shift in the decision-making structure of American corporations – away from one based on managerial expertise towards one based on fi a ial e pe tise. U de the lassi odel of a age ial apitalis , a age s o t olled corporate strategic and operational decision-making while dispersed shareholders had little i put Be le a d Mea s . U de a g o i g odel of fi a ial apitalis , sha eholde s and activist investors play an influential or dominant role in management decisions in order to maximize their returns, thereby limiting managerial discretion (Davis 2009). The debate over which of these approaches yields higher financial performance and shareholder returns centers on the predictions of agency theory, which posits that the financial model provides higher returns because it more effectively aligns the interests of shareholders and managers. The debate has received substantial attention in the economics and management literatures, but relatively little in the field of industrial relations where research has focused more on the changing nature of product and labor market institutions. If the financial model is more effective in yielding better shareholder outcomes, then how is this achieved and what are the implications for employees and the quality of jobs? Some argue that shareholder influence leads managers to adopt more innovative approaches, which might include investing more in human resource management (Jackson, Höpner, and Kurdelbusch 2005; Deakin, Hobbs, Konzelmann, and Wilkinson 2006). Others argue that higher returns come at the expense of employees and other stakeholders because shareholders prefer short-term value creation from their investments over long-term commitment to the business. Where shareholders have more concentrated power, they may induce companies to adopt human resource management practices that emphasize the pursuit of flexibility and liquidity at the expense of employees or other stakeholders (Cappelli, Bassi, Katz, Knoke, Osterman, and Useem 1997; Black, Gospel, and Pendleton 2007). In this paper, we begin to address these questions. To what extent do different ownership structures and shareholder behaviors lead to differences in the quality of jobs? Do companies with more concentrated ownership differ in the quality of jobs they offer compared to those with more dispersed patterns? Do different sources of capital influence the allocation of resources, and in turn, the quality of jobs? We focus on a limited number of ownership structures and investor behaviors that agency theory predicts influence management decision-making. These include the structure of equity ownership (how broadly shares are held), shareholder behavior (the degree of share turnover) and the sources of capital (the relative use of debt versus equity). We examine the relationship between these characteristics and the quality of jobs of employees by matching
2
publicly available data on capital ownership characteristics and firm financials with data from an establishment-level survey of work and employment practices. We conceptualize the quality of jobs along three dimensions: the compensation level, the amount of discretion at work, and the level of employment security – which taken together fo a jo ualit i de . Our assumption is that high quality jobs derive from investments in human capital as an asset, rather than viewing labor as a cost to be minimized (Oi 1962). Higher quality jobs provide employees with opportunities to use their discretion and reward them with higher pay and with job security. The study draws on a sample of 293 call center establishments in North America. This setting is an appropriate one for this study because these centers are often viewed as routine operations with little strategic value. When firms focus on operational efficiencies or cost cutting to maximize profits, call centers are among the first to be targeted. Thus, we are more likely to observe the impact of short-term strategies here than in other more value-added operations. Prior Literature Agency theory informs the debate over whether managerial or financial models of capitalist enterprise produce better firm performance. The logic of the managerial model draws on the assumption that professional managers with deep expertise in their industries and long term experience in their firms are the most knowledgeable for making decisions to e su e thei o pa s fi a ial pe fo a e a d lo g te g o th Cha dle . These managers have the autonomy to make decisions because shareholders are relatively dispersed and lack the power to monitor or control managerial behavior. Managers use this autonomy to balance competing interests. Maximizing short-term shareholder returns through dividends or improvements in share price is a primary concern, but not the only one. Managers are also concerned about long-term growth and sustainability and use retained earnings to invest in innovations, growth strategies, or human resource management practices; or negotiate contract improvements with organized labor to ensure labor cooperation and peace. This suggests that managers have the opportunity and the incentive to consider the interests of employees as stakeholders and to create relatively high quality jobs – with discretion on the job, higher pay, and job security -- in order to ensure employee commitment to the long term growth and sustainability of the enterprise (Lazonick 1992, 2009). According to agency theory, these alternate uses of retained earnings are not legitimate because they reduce returns to shareholders. Effective monitoring and influence by shareholders over managers is needed to align their interests and ensure the maximization of shareholder value (Jensen 1989, 1993). Agency theory interprets the alternative uses of retained ea i gs as a age ial oppo tu is , th ough hi h a age s use o po ate resources for their own benefit or career advancement. Based on these ideas, scholars in employment relations and human resources argue that shareholder pressure may restrict the
3
capacity of managers to adopt employment practices that enhance the quality of jobs (Gospel and Pendleton 2003). Prior studies empirically testing these arguments have progressed along two lines. One stream of research compared divergent national employment practices in liberal market economies and in relational market economies, and discussed their relations to stock market activities. These studies generally indicate that management is likely to adopt a commitmentbased approach to employment relations in countries where there are strong stock markets for corporate finance, shareholder-oriented corporate governance, high protection of minority shareholders, and active market for corporate control. For example, analyses of OECD national data indicated that high levels of stock trading and M&A activities were associated with shorter job tenure, more variable pay schemes, and greater pay dispersion between management and workers (Black, Gospel, and Pendleton 2007; Sjöberg 2009). However, some researchers cast doubt on these findings because distinct labor market outcomes may result from other features of national systems such as legal regimes (Armour, Deakin, Lele, and Siems 2009). In addition, the use of aggregated level data may mask significant differences that exist among establishments within the same country. The other stream of studies investigated the relationship between financial structure, corporate governance, and managerial practices among companies located in a single country. Findings of this steam of studies are largely inconclusive, however. For example, Conway and colleagues (2008) reported that publicly listed firms in France were positively associated with teamwork, performance-based pay, work autonomy, and training. However, the effect of stock market listing was only significant on teamwork and performance-based pay among establishments in Britain. Finally, contradictory to predictions, listing was not associated with worker engagement on workplace changes or target setting in either country. Because stock market listing is a rather crude measure of finance and corporate structures, the researchers called for more precise analyses of ownership structures among listed companies. In this study, we examine whether the degree of dispersion of ownership, levels of share turnover, and the degree of reliance on debt finance influences the overall quality of jobs. Equity ownership structures Following the logic of agency theory, one way to strengthen shareholder monitoring and control over management is through increased concentration of share ownership. Owners with significant amount of equity shares have strong incentives to safeguard their investments. Therefore, they take aggressive actions over corporate decisions via the election of board members and replacement of management with their voting power, as well as the adoption of equity-based managerial schemes. As such, in publicly listed corporations with a limited number of large investors, those investors are likely to have a disproportionate influence over
4
the strategic direction of the firm. The question, then, is in what ways does concentrated versus dispersed ownership shape management decisions that affect the quality of jobs? One line of argument, as implied by agency theory, is that owners with more concentrated power are more able to monitor managers when these owners value the maximization of short-term shareholder returns. This requires managers to have a clear focus on improving internal efficiencies and cutting costs, as opposed to longer-term strategies of investing in human capital and human resource practices that underpin innovation and higher quality jobs. By contrast, firms with a low level of ownership concentration (dispersed ownership) allow greater managerial discretion because investors with less ownership interests have little incentive to pay attention to the strategic decisions of the firm and thus, are less motivated to closely monitor and discipline top executive behaviors (Shleifer & Vishny, 1997). In addition, organizing dispersed owners to exert collective power over management incurs substantially coordination costs. Therefore, managers in dispersedly owned firms have more autonomy to make decisions regarding investments in technologies, innovation, or human resource strategies. Nevertheless, some argues that concentrated ownership promotes a long-term time horizon of investment because large shareholders are better informed. When earnings are weak, these investors are able to tell whether the cause is low firm quality or desirable long-term investment. When the reason is low quality, the investors will punish management by selling and depressing stock price. When investing in long-term projects in the reason, investors do not sell, which mitigates the stock price decline caused by negative earning information. In other words, investment of large investors may protect a firm from stock market shocks, encouraging it to focus on long-term value (Edmans, 2009). This argument is consistent with several empirical studies, which reported a positive relationship between ownership o e t atio a d ‘&D i est e ts e.g., Ba si ge , Kos ik, & Tu k, ; Lee & O Neil, . Hypothesis 1: Concentration of ownership is negatively associated with the quality of jobs. Literature on investor recognition has recently examined the role of ownership breadth, or the number of share owners of a listed firms. This small but growing literature relies on assumptions of information asymmetry and suggests that people tend to invest only in stocks that they are familiar with when they construct their investment portfolios. If only a limited number of investors hold a particular stock, market equilibrium leads to a situation in which these investors take large undiversified positions in the stock (Merton 1987). To compensate for the increased idiosyncratic risks associated with their large positions, these investors require
5
higher expected returns, which in turn increases the cost of equity capital (Amihud, Mendelson, and Uno 1999; Bodnaruk and Ostberg 2009) and reduces the availability of capital for other purposes, including investments in human capital or human resource practices. In contrast, when a firm has a diversified shareholder base, a greater fraction of the market is informed about a o pa s stock (Grullon, Kanatas, and Weston 2004). The larger pool of investors from whom to the firm can raise financing thus lower cost of capital. Therefore, managers in these firms worry less about constraints posed by insufficient funds. Moreover, having a large number of shareholders reduces informational disadvantages for outside investors (Hasbrouck 1991; Holmström and Tirole 1993). Research in finance indicates that security analysts are more likely to cover firms with more investors (e.g., Bhushan ; O B ie . A al sts reports and recommendations often consist of informed a al ses o a fi s a ket positio a d its lo g-term growth strategies. These insights alleviate information asymmetry for sha eholde s a d e ou age the to u de sta d the fi s operation beyond current stock value. Analyst following is especially critical for firms with more intangible assets such as human resources, because estimated fair values of intangible assets are not disclosed in annual reports (Barth, Kasznik, and McNichols 2001). Therefore, investors of firms with large shareholder bases are more inclined to support human resource investments that are strategically imperative to corporate competitiveness. Several studies have reported a positive empirical relationship between ownership breadth and sustainable business strategies. For example, Filatotchev and Toms (2003) found that firms with a larger number of shareholders have superior resources to develop effective turnaround strategies and to survive in a turbulent environment. Fernando, Sharfman, and Uysal (2010) reported that firms owned by a larger number of shareholders exhibited better environmental performance. Building upon these discussions, we posit that breadth of ownership is positively associated with higher compensation, more discretion on the job, more job security, and higher overall job quality. Hypothesis 2: Breadth of ownership is positively associated with the quality of jobs. Shareholder turnover Shareholders without the power to influence management strategies or who are dissatisfied ith the pe fo a e of a o pa s sto k a e it selli g thei sha es. High turnover i a o pa s sto k suggests that its shareholders have short investment horizons (Wang 1994; Gaspar, Massa, and Matos 2005). These investors have a strong interest in p ofiti g f o f e ue t sto k t adi g, athe tha a fi s lo g-term growth. Consistent with a financial model of the firm, they view firms as portfolios of financial assets deployed to maximize near-term appreciation of their shares. Therefore, they generally base their trades on narrow financial objectives such as stock prices and current earnings. When a fi s sto k p i e
6
fails to meet their expectations, these investors exercise the exit option via selling stocks in the capital market. The excessive focus on short-term earnings increases stock price volatility and the risk of hostile takeover. Therefore, managers of these firms are under intense pressure to maximize short-term earnings and avoid earnings disappointments, even at the expense of the long-term performance of their firm. For example, in a longitudinal study of 100 U.S. large companies, Bange and Bondt (1998) found that firms with high stock turnover were more likely to adjust esea h a d de elop e t udgets i o de to edu e the a ti ipated gap et ee a al sts earnings fo e asts a d epo ted i o e. Bushee fou d that he a fi s i stitutio al investors had a high share turnover and were momentum traders, the firm had a higher probability of reducing research and development expenditure to reverse an earnings decline. Neubaum and Zahra (2006) showed that long-term and short-term shareholders maintained divergent views about corporate social performance. By contrast, a firm with low share turnover is more likely to have investors who have purchased the fi s sto k as a lo g-term holding. This investment strategy also provides incentives for these investors to obtain info atio othe tha ea i gs to assess the a age s pe fo a e, thereby encouraging managers to focus on long-term value rather than on short-term earnings. They are more likely to adopt HR practices that improve job quality and enhance long-term growth and profitability. Hypothesis 3: Shareholder turnover is negatively associated with the quality of jobs. Debt A othe a i hi h a fi s o e ship st u tu e a a is i the p opo tio of investment capital that comes from debt as opposed to equity or retained earnings. Under managerial forms of capitalism, US firms relied primarily on a combination of retained earnings and shareholder equity to finance on-going operations and expansions. In recent decades, however, debt financing has become more attractive for several reasons. In theory, it helps solve the principal/agent problem because high levels of debt discipline managers to focus on the most efficient ways to repay the debt and maximize shareholder value (Jensen 1986: 5975). Debt financing allows firms to return a higher percentage of retained earnings to shareholders and allows financial analysts to evaluate the investment strategies of managers based on their efficient use of capital (Kaufman and Englender 1993). Large, stable corporations may use their assets as collateral for the debt. Low interest rates and the preferential tax treatment that debt receives compared to that of retained corporate earnings makes debt financing even more attractive. A fi s debt level, or financial leverage, also affects corporate decisions because it may limit funds available for investment and convey information regarding operational risks to creditors and investors (Harris and Raviv 1991; Miller and Bromiley 1990). Firms with high
7
leverage run a high risk of bankruptcy, which can incur significant economic loss. In a study of thirty-one highly leveraged firms, Andrade and Kaplan (1998) reported that the costs of going th ough sol e a ged et ee to pe e t of a fi s alue. The efo e, fi ms with excessive debt levels are forced to pay out excess funds to service debts. Obligations to creditors may induce managers to withhold or even forego investment in strategic assets that will accrue in the long term. Past research has shown that the sha e of de t i a fi s apital structure is associated with decreased investment in research and development and increased probability of plant closure (Jordan, Lowe, and Taylor 1998; Simerly and Li 2000; VincenteLorente (2001). In this context, a firm s ability to sustain investments in high paying and stable jobs is questionable. Instead, firms with high debt are more likely to adjust employment levels to business cycles, to use contingent workers to replace regular workers, to lower wages, and to reduce contribution to employee pension plans (Sharpe, 1994, Hanka, 1998). By contrast, firms with low financial leverage have the resource slack to buffer cash flow volatility and sustain employment levels and investments in human resource practices even during difficult times. A ha dful of e pi i al studies ha e add essed this uestio . T o fou d that a fi s le e age had no significant relationship to the likelihood of downsizing (Budros 1997) or layoffs O “haugh ess a d Fla aga 1998). Two others found significant effects. In a study of 358 firms, Ofek (1993) found that when highly leveraged firms experienced short-term distress, they had a strong propensity to reduce 10% or more of their workforce over the year. Gittell, Cameron, Lim, and Rivas (2006) conducted an in-depth analysis of ten major U.S. airlines from 1987 to 2005. They found that the fi s debt ratio was positively associated with layoffs. In su , theo a d the e pi i al e ide e suggest that high de t le els u de i e fi s a ility to sustain high quality jobs. Hypothesis 4: Financial leverage is negatively associated with the quality of jobs. Institutional Context The relationship between ownership structures and management and employment practices is likely to be affected by the institutional context in which firms are located. In this study, we examine US and Canadian establishments operating in the North American market. While oth ou t ies a e t pi all lassified as li e al a ket e o o ies ha a te ized market-led coordination of economic activity (Hall and Soskice 2001), prior research has shown that the two countries differ in important ways. Relevant to this study are the relatively stronger labor market institutions in Canada – for example, stronger employment protection laws and higher levels of unionization (Card and Freeman 1993; Colvin 2006; van Jaarsveld, Kwon, and Frost 2009).
8
Moreover, recent studies have shown that the cost of equity financing is higher in Canada than it is in the US (Zorn 2007; Witmer and Zorn 2007). Witmer and Zorn (2007) show that in Canada larger firm size is associated with a lower cost of equity; firms with greater debt levels have a higher cost of equity; firms with higher levels of stock liquidity have a lower cost of equity; and firms with more imprecise earnings estimates by analysts have a higher cost of equity. These relationships are also true in the US. However, once all these relationships are controlled for, Canadian firms in their sample have a cost of equity that is 30 to 50 basis points higher than that found for comparable US firms over the 1988 - 2006 period. The authors then seek to explain this differential by examining the role played by the risk free rates (the rate associated with government bonds) faced by these firms. The risk free rate is an indicator of the macroeconomic environment firms face and reflects differences in monetary and fiscal policy regimes. Once long-term government bond yields in the two countries are controlled for, the differences in the cost of equity financing decrease and become statistically insignificant. Given these findings, the differences in firm characteristics and in macro economic environments in the two countries are expected to lead to differences in the cost of equity financing faced by firms in the two countries. Based on these institutional differences, we expect to find divergent relationships between ownership structures and job quality. Nonetheless, the theoretical predictions as to how these differences may affect the current study are unclear. On the one hand, it could be that stronger labor market institutions constrain the influence of shareholders on management practices. On the other hand, a higher cost of equity financing may force management to be even more cost conscious than their US counterparts when faced with the discipline of the equity market. For this reason, we make no predictions about these effects, but explore them in the analyses that follow.
Methods Sample The data for this study come from an establishment level survey of call centers in the US and Canada1. The Cornell University Survey Research Institute administered the telephone survey in both countries. The US survey was administered in 2003, and the Canadian survey in 2005-06. It covered a series of questions regarding market conditions, organizational characteristics, human resource practices, collective bargaining coverage, and workforce characteristics. The respondent was the general manager of each center, who answered 1
The survey was part of a larger international study of management practices in call center establishments, the Global Call Center project, led by Rosemary Batt, David Holman, and Ursula Holtgrewe (See Batt, Holman, & Holtgrewe, 2009).
9
questio s fo used o the o e o upatio al g oup, that is, usto e se i e ep ese tati es. In both the US and Canada, call centers were required to have at least 10 employees for inclusion in the study. The establishment level of analysis is appropriate because it is considered to be more reliable than corporate level surveys (Gerhart, Wright, and McMahan 2000). The US sample is a stratified random sample from two sources: roughly 60% came from a Call Center Magazine list representing call centers across a broad array of industries and sectors, and the remaining 40% were taken from a Dun and Bradstreet listing of telecommunications establishments. The response rate for the US survey was 68%. Due to the unavailability of a comprehensive list of Canadian call centers, the Canadian researchers developed one from several sources using membership lists of provincial call centers, industry experts including economic development officials across Canada, Contact Center Canada (a federal sector council), and Internet research (van Jaarsveld, Kwon, and Frost, 2009). This yielded 3,000 centers spanning all provinces and a wide cross-section of industries. From this list, 580 call centers were randomly selected to participate in the survey. The response rate was 70% with 406 usable cases. The US and Canadian samples are fairly comparable with two exceptions. The US study oversampled telecommunications call centers, whereas the Canadian sample consists of a higher proportion of outsourced call centers. The larger proportion of outsourced centers in Canada captures centers that provide services to the US (van Jaarsveld, Kwon et al., 2009). These characteristics are controlled for in the pooled analyses of the data. We then matched the survey data to financial information for the publicly traded companies in our sample. After identifying the company with which each establishment was affiliated, e the esea hed the o pa ies corporate structures using electronic databases, company websites, and industry expertise. The US sample consists of 103 publicly traded companies in 27 two-digit Standard Industrial Classification (SIC) industry groups whereas the Canadian sample includes 66 publicly traded companies in 20 two-digit SIC industry groups. We gathered further ownership details on these cases by identifying the primary and secondary stock markets for each company from Hoo e s Co pa ‘e o ds, Wa d s Busi ess Di e to , a d othe sou es. In addition, using stock market tickers, we extracted financial and corporate governance variables (e.g. breadth of ownership, leverage (debt/equity) and share turnover) from Compustat and Thomson Financial 13F database. We gathered financial data based on a three-year average prior to the administration of the survey (1999-2001 for the US sample and 2002-4 for the Canadian sample. The final sample includes 293 establishments, with approximately 250 used in our analysis. The US sample includes 184 establishments representing 103 listed firms. The
10
Canadian sample includes 109 establishments representing 66 publicly traded companies. We present the number of firms by their primary stock market listing in Table 1. We excluded publicly traded firms listed on non-North American markets from the analysis. -- insert Table 1 about here -To ensure we were comparing the companies with their competitors within their industry, we created 2-digit industry level adjusted factors by collecting 36,561 observations of 14,168 listed companies over the period of 1999-2001 in the United States, and 34,077 observations of 12,699 listed companies over the period of 2002-2004 in Canada. They represent financial data of all firms available from Compustat during the selected time periods. Measures Dependent Variables. Our dependent variables include three measures of job quality: (1) compensation, (2) discretionary work design, and (3) employment security. Compensation is an additive index of gross annual earnings plus the cost of benefits for customer service agents. Annual earnings is based on the gross annual earnings for the typical full-time employee before deductions and taxes, including wages, earnings, bonuses, commissions, profit sharing, and overtime pay, but excluding benefits such as pensions, health, and deferred compensation such as stock options. We asked about the median worker to reduce the influence of especially well paid or especially low paid workers in a given establishment. Benefits is the total value of benefits core employees receive as a proportion of gross annual earnings. These benefits are at the e plo e s dis etio , su h as supple e ta health a e o e age as opposed to ei g legislatively mandated. We measured discretionary work design with three variables: the extent of employee discretion, use of problem-solving teams, and use of self-directed teams (Batt 2002). Employee discretion is a seven-item index, with items measured on a five-poi t Like t s ale f o o e, , to o plete, (MacDuffie 1995; Batt 2002). Sample items include the level of employee discretion over the daily work tasks; tools, methods, or procedures; what they say to the customer; their lunch and break schedule; a d ha dli g additio al usto e e uests α=. . Self-directed teams is the percentage of workers organized into online, semi-autonomous groups while problem-solving groups is the percentage of workers involved in off-line groups with supervisors to discuss work related issues. The work design index is the mean of the standardized values of discretion, problem-solving groups, and self-directed teams. Employment security is based on two measures -- dismissal rates and the percent of the workforce that is temporary. Dismissal rate measures the percentage of the core workforce that was dismissed in the previous year. Use of temporary workers is the percent of agents hired on a temporary basis either directly or through an agency. The index is the mean of the standardized values of these variables.
11
Independent Variables. Our independent variables include: (1) concentration of ownership, (2) breadth of ownership, (3) share turnover, and (4) financial leverage. Concentration of ownership is measured as the percentage of outstanding shares owned by the top ten largest owners in the previous fiscal year, using data from the Thomson Financial 13F database. As a high ratio indicates high concentration of ownership, shareholders can exert more influence over the firm and monitor more effectively. Following Grullon, Kanatas and Weston (2004), we measure breadth of ownership as the number of common shareholders of record at the end of the fiscal year prior to data collection. Because of the positive skewed nature of this variable, we use a log transformation. Share turnover is a measure of stock liquidity calculated by dividing the total number of shares traded over a period by the average number of shares outstanding for the period (LeBaron, 1992; Campbell, Grossman, & Wang, 1993). Higher share turnover means that the shares of the company are more liquid. High turnover indicates that investors have a strong i te est i p ofiti g f o se o da t adi g i stead of a fi s lo g-term growth. In other words, these investors view firms as portfolio of financial assets deployed to maximize nearte app e iatio of thei sha es. To o t ol fo spu ious e e ts, e al ulate a fi s a e age share turnover over a three-year period prior to data collection. We then subtract the mean value of share turnover based on 2-digit SIC indust g oups f o ea h fi s sha e tu o e to create industry-adjusted share turnover indicators. Financial leverage (debt/equity ratio) refers to the amount of debt used to finance a firm's assets. A firm with significantly more debt than equity is highly leveraged. Financial leverage is measured as the ratio between long-term debt and common equity (D/E ratio). To reduce temporal bias, we calculate the average D/E ratio of each firm over a three-year period prior to data collection. Since the capital structures of firms within an industry are more alike than those in different industries (Harris and Raviv, 1991), we then subtract the mean value of D/E ratio based on 2-digit “IC i dust g oups f o ea h fi s D/E atio to eate i dust adjusted D/E atios. The efo e, e easu e a fi s financial leverage relative to other firms competing in the same industry, rather than the absolute degree of debt. We control for characteristics that may influence our dependent variables at both the establishment and firm levels. At the establishment level, we control for number of employees, percent of women, average education level, and percent of the workforce that is unionized. At the firm level, we control for size (as measured by total assets), financial performance (as measured by Tobin s-q ratio), capital intensity (as measured by capital expenditure to sales ratio), growth opportunities (as measured by dividend yield), primary stock exchange (e.g. New York Stock Exchange, NASDAQ, and Tronoto Stock Exchange), and industry (e.g. telecommunications, financial services). Results
12
Table 2 provides descriptive statistics and correlations for all variables. Table 3 reports the regression results. Because some establishments are affiliated with the same listed parent company, we adjusted the standard error by computing a cluster robust standard error for the coefficients. We ran similar models for the three dimensions of job quality, and the overall index. Models 1-4 test main effects of the independent variables. Models 5-8 introduce the moderating effect of country. -- insert Table 2 about here -Hypothesis 1 posits that concentrated ownership negatively affects job quality. This hypothesis is marginally supported. As predicted, employment security is attenuated among Canadian firms owned by dominating shareholders who can closely monitor organizational activities and limit managerial discretion. As a result, managers have to take shorter time horizon over which they design and implement employment practices. Nevertheless, this effect is not significant among American establishments. Contradictory to our predictions, we found that a high level of ownership concentration is positively associated with better compensation, job discretion and overall job quality for workers in U.S. establishments. -- insert Table 3 about here -Hypothesis 2 proposes positive relationships between breadth of ownership and HR practices that enhance the quality of jobs. The results are consistent with this hypothesis. A larger investor base is significantly associated with higher wages and benefits, more discretion at work, and overall, better jobs. We comparing the United States and Canada, we find that the positive effect of ownership breadth is more significant on compensation and job quality among Canadian establishments while it is more significant on job discretion among American establishments. However, the effect of ownership breadth on employment security is not statistically significant. Thus, Hypotheses 2 is largely supported. In Hypothesis 3, we expect that high tu o e of a fi s sto k egati el elates to jo quality. Results indicate that the effect of share turnover on compensation is significant and negative as hypothesized, although its effects on discretion at work and job security are not statistically significant. The overall effect of share turnover on job quality is significantly negative. This finding provides support for Hypothesis 3. Hypothesis 4 p edi ts that jo ualit de eases he a fi s fi a ial le e age is high. Results of the ai effe ts i di ate that a i ease i a fi s de t le el is egati el associated with compensation in Canada, but positively associated with job security and overall job quality in the United States. The findings for the control variables are also noteworthy and they behave in a predictable fashion. Larger establishments have significantly lower job quality along several dimensions, presumably because they are taking advantage of advanced technologies and economies of scale that are available to larger establishments and that prior research has
13
shown are associated with lower skilled, more routinized jobs. Establishments that hire a higher proportion of women offer lower quality jobs, while those that hire more educated workers offer higher quality jobs. Unionized workplaces score significantly higher than nonunion workplaces on overall compensation and the overall job quality index. Discussion In this study, we examined whether variation in ownership structures and shareholder behavior is related to the adoption of human resource investment strategies that shape the quality of jobs. We focused on the dimensions of ownership characteristics of firms that prior theory and empirical research have emphasized as important to firm decision-making but which have not been analyzed in light of employment practices. These dimensions of firms are indicative of the extent to which financial investors may have influence over managerial decision-making. In theory, firms with more concentrated share ownership, greater shareholder turnover, and greater use of financial leverage are more likely to respond to investor demands for maximization of short-term returns; these demands, in turn, lead managers to focus on internal efficiencies and short-term cost-cutting – policies at odds with investing in human capital and providing stable jobs with high discretion and high relative pay. Our findings are quite consistent with the predictions of theory. Firms with a broader shareholder base scored significantly higher on measures of compensation and overall job quality than did those with more concentrated ownership structures. Firms with high levels of shareholder turnover had significantly lower levels of compensation, discretion on the job, and overall job quality – as did those firms with high levels of debt. The findings regarding the differences between the US and Canada are also noteworthy. Shareholder turnover had significantly stronger negative effect on compensation and overall job quality, while financial leverage had a significantly more negative effect on discretion and overall job quality. This may be due to institutional differences between the two countries. In the Canadian sample, workers enjoy higher levels of discretion on the job than do their American counterparts. When management is constrained by stock market realities (greater share turnover and higher leverage) and the need to respond to shareholder demands rather than face the need to raise money in a more expensive equity environment, management in Canada may reduce worker discretion on the job more than their American counterparts would in similar circumstances. The same may be true for the reduction of compensation. When both compensation and discretion on the job are negatively affected, the overall job quality index is also impacted. There appears to be no differential effect on job security in the two countries. One reason may be that job security levels are similar – although the dismissal rate in Canada is lower (due to the effects of provincial Employment Standards legislation), Canadian employers tend to use more temporary workers as a way to add flexibility to their workforce. [related paper: Gedajlo i , E i ‘., Da iel M. “hapi o, . Ma age e t a d O e ship Effe ts:
14
Evidence from five countries, SMJ, 1998] This study also has limitations that require the results to be interpreted cautiously. While we find significant relationships between ownership characteristics and the quality of jobs, the causal story is undeveloped. We attempted to make our research design rigorous by matching objective data on firm characteristics in time one to survey data collected at time two (a three year average of ownership characteristics prior to the survey administration). We also controlled for other explanations of the quality of jobs, including firm financial performance at time one (which provides resources for better jobs), industry variation, workforce characteristics, and unionization. Workforce characteristics and unionization were particularly significant in their relationship to job quality measures. These strategies mitigate some questions about alternative explanations, but do not completely address issues of causality. Nonetheless, we believe the findings here are provocative and should generate additional inquiries into how ownership structures and shareholder behaviors affect management strategies and employment outcomes. Several research questions are important. Of particular importance is qualitative and theory-building research to help explain the mechanisms through which investors influence firm choices. How important is the role of analysts? How important is the structure of executive compensation in linking top management decisions to investor interests? Under what conditions are investors willing to forego short-term gains for longer-term returns based on innovation and growth strategies?
15
References Amihud, Y., Mendelson, H., and Uno, J., 1999. Number of shareholders and stock prices: evidence from Japan. Journal of Finance 54, 1169–1184. Armour, J. Deakin, J. , Lele, P., and Siems, M. 2009. How do legal rules evolve? Evidence from a cross-country comparison of shareholder, creditor, and worker protection. American Journal of Comparative Law. 57(3): 579-629. Andrade, Gregor, and Steven Kaplan, 1998, How costly is financial (not economic) distress? Evidence from highly leveraged transactions that become distressed, Journal of Finance 53, 1443– 1493. Bange, Mary M. and De Bondt, Werner, F. M. 1998. R&D Budgets and Corporate Earnings Targets. Journal of Corporate Finance 4, 153–184 Barth, M., Kasznik, R., McNichols, M., 2001. Analyst coverage and intangible assets. Journal of Accounting Research, Vol.39, No.1, pp.1-34. Batt, R. 2002. Managing customer services: Human resource practices, quit rates, and sales growth. Academy of Management Journal 45: 587-597. Batt, R., Holman, D. and Holtgrewe, U. (2009). The globalization of service work: Comparative institutional perspectives on call centers: Introduction to a special issue of ILRR. Industrial and Labor Relations Review 62(4): 453-488. Berle, Adolph, and Gardiner Means. 1932. The Modern Corporation and Private Property. New York: Transaction Publishers. Black, B., H. Gospel, and A. Pendleton. 2007. Finance, corporate governance, and the employment relationship. Industrial Relations46(3): 643-650. Bodnaruk, Andriy and Per Östberg, 2009. Does Investor Recognition Predict Returns?, Journal of Financial Economics 91, 208-226. Bhushan, R, 1989. Firm Characteristics and Analyst Following. Journal of accounting & economics, 11 (2-3), 255. Budros, A. 1997. The new capitalism and organizational rationality: The adoption of downsizing programs, 1979-1994. Social Forces, 76: 229-250. Bushee, B. 1998. The influence of institutional investors on myopic R&D investment behavior. Accounting Review, 73: 19-45. Campbell, J. Y., Grossman, S. J. and Wang, J. (1993). Trading volume and serial correlation in stock returns. The Quarterly Journal of Economics 108(4): 905. Cappelli, P., Bassi, L., Katz, H., Knoke, D., Osterman, P., & Useem, M. 1997. Change at work: How American industry and workers are coping with corporate restructuring and what workers must do to take charge of their own careers. New York: Oxford University Press. Card, David, and Richard B. Freeman. 1993. Small Differences That Matter: Labor Markets and Income Maintenance in Canada and the United States. Cambridge, MA: National Bureau of Economic Research. Chandler, Alfred D. Jr. 1990. Scale and Scope: The Dynamics of Industrial Capitalism. Cambridge, MA: Harvard University Press. Col i , Ale a de J. “. . Fle i ilit a d Fai ess i Li e al Ma ket E o o ies: The Comparative Impact of the Legal Environment and High-Pe fo a e Wo k “ ste s. British Journal of Industrial Relations, Vol. 44, No. 1, pp. 73–97.
16
Deakin, S., Hobbs, R., Konzelmann, S. and Wilkinson, F. 2006. Anglo-American corporate governance and the employment relationship: a case to answer?. Socio-Economic Review, 4: 155–74. Fernando, C.S., Sharfman, M.P., and V.B. Uysal. 2010. Does greenness matter? The effect of corporate environmental performance on ownership structure, analyst coverage and firm value. University of Oklahoma Working Paper. Filatotchev, I. and Toms, S. 2003. Corporate governance, strategy, and survival in a declining industry:A study of UK cotton textile companies, Journal of Management Studies, 40: 895– 920. Gaspar, José-Miguel, Massimo Massa, and Pedro Matos, 2005, Shareholder investment horizon and the market for corporate control, Journal of Financial Economics 76: 135-165. Gerhart, B. A., Wright, P. M. and McMahan, G. C. (2000). Measurement error in research on the human resources and firm performance relationship: Further evidence and analysis. Personnel Psychology 53(4): 855-872. Grullon, G., Kanatas, G. and Weston, J. P. (2004). Advertising, breadth of ownership, and liquidity. Review of Financial Studies 17(2): 439. Gittell, J. H., Cameron, K., Lim, S., & Rivas, V. 2006. Relationships, layoffs, and organizational resilience: Airline industry responses to September 11. Journal of Applied Behavioral Science, 42: 300-329. Gospel, H. and Pendleton, A. 2003. Finance, corporate governance, and the management labor: A conceptual and comparative analysis. British Journal of Industrial Relations, 41(3): 557-582. Grullon, Gustavo, George Kanatas and James P. Weston. 2004. Advertising, Breadth of Ownership, and Liquidity. The Review of Financial Studies,. 17(2): 439-461. Hall, PA and DW Soskice. 2001. Varieties of Capitalism. Oxford University Press. Harris, Milton and Artur Raviv, 1991. The theory of capital structure, Journal of Finance 46: 297355. Hasbrouck, J., 1991. The summary informativeness of stock trades: An econometric analysis. Review of Financial Studies, 4: 571-595. Holmström, Bengt and Jean Tirole. 1993. Market Liquidity and Performance Monitoring. Journal of Political Economy, Vol. 101, No. 4, 678-709 Jackson, G., Höpner, M. and Kurdelbusch, A. 2005. Corporate governance and employees in Germany: changing linkages, complementarities, and tensions. In H. Gospel and A. Pendleton (eds.), Corporate Governance and Labour Management: An International Comparison. Oxford: Oxford University Press, pp. 84– 121. Jensen, M.C. 1986. Agency costs of free cash flow, corporate finance and takeovers, American Economic Review, 76(2): 59-75. Jensen, M. C. 1989. The E lipse of the Pu li Co po atio , Harvard Business Review, September-October: 61-74. Jensen, M. C. 1993. The Mode I dust ial ‘e olutio : E it a d the Failu e of Internal Control “ ste s, Journal of Financial Economics,48: 831-880. Jordan, J., Lowe, J., and Taylor, P. 1998. Strategy and Financial Policy in SMEs. Journal of Business Finance and Accounting. Vol 25 (1/2) pp 1-18
17
Kaufman, A & E Englender. 1993. Kohlberg, Kravis Roberts & Co and the restructuring of American capitalism. Business History Review, 67: 52-97. Lazonick, William. 1992. Controlling the market for corporate control, Industrial and Corporate Change, 1(3): 445-488 Lazonick, William. 2009. Sustainable Prosperity in the New Economy. Kalamazoo, MI: W.E. Upjohn Institute. LeBaron, B. 1992. Some relations between volatility and serial correlations in stock market returns. Journal of Business: 199-219. MacDuffie, J. P. 1995. Human resource bundles and manufacturing performance: Organizational logic and flexible production systems in the world auto industry. Industrial and Labor Relations Review 48(2): 197-221. Merton, RC. 1987. A simple model of capital market equilibrium with incomplete information. The Journal of Finance, 42 (3), 483. Miller, Kent, D. and Philip Bromiley. 1990. Strategic Risk and Corporate Performance: An Analysis of Alternative Risk Measures. Academy of Management Journal, 33(4): 756-779. Neubaum, D. O. and Zahra, S. A. 2006. Institutional ownership and corporate social performance: the moderating effects of investment horizon, activism, and coordination. Journal of Management, 32, 108–31 O'Brien, PC. 1990. Analyst following and institutional ownership. Journal of Accounting Research, 28, p. 55. Ofek, E. 1993. Capital structure and firms response to poor performance. Journal of Financial Economics, 34, 3-30 Oi, Walter. 1962. Labor as a quasi-fixed factor. The Journal of Political Economy, 70(6):538555. O “haugh ess K. C., & Flanagan D. J. 1998. Determinants of layoff announcements following M&As: An empirical investigation. Strategic Management Journal, 19: 989-999. Simerly RL, Li M. 2000. Environmental dynamism, capital structure and performance: a theoretical integration and an empirical test. Strategic Management Journal 21: 31-50. Sjöberg, O. 2009. Corporate governance and earning inequality in the OECD countries 19792000. European Sociological Review. 25(5): 519-533. van Jaarsveld, D., Kwon, H. and Frost, A. C. 2009. The effects of institutional and organizational characteristics on work force flexibility: Evidence from call centers in three liberal market economies. Industrial & Labor Relations Review 62(4): 573-601. Vincente-Lorente JD. 2001. Specificity and opacity as resource-based determinants of capital structure: evidence for Spanish manufacturing firms. Strategic Management Journal 22(2): 157–177. Wang, J., 1994. A Model of Competitive Stock Trading Volume", Journal of Political Economy 102, 127-168 Witmer, J and Zorn, L. 2007. Estimating and comparing the implied cost of equity for Canadian and U.S. firms. Working Paper 2007-48, Ottawa: Bank of Canada. Zorn, L. 2007. Estimating the cost of equity for Canadian and U.S. firms. Bank of Canada Review. Autumn: 27-35. Pan, E. (2009) Structural Reform of Financial Regulation: The Case of Canada. Cardozo Legal
18
Studies Research Paper No. 250. Li, K. and E. Broshko. (2006) Corporate Governance Requirements in Canada and the United States: A Legal and Empirical Comparison of the Principles-based and Rules-based Approaches. Canadian Investment Review.
19
Table 1 Canada
United States
Total
New York Stock Exchange (NYSE) Over the Counter Bulletin Board (OCTBB) and other OTC NASDAQ-NMS Stock Market Toronto Stock Exchange (TSX) Others (e.g. Consolidated Parent or Tracking Stock Company)
73
125
198
5 17 14
21 28 1
26 45 15
9
9
Total
109
184
293
Primary Stock Market
20
Table 2. Descriptive Statistics and Correlation Matrix Mean 1. Job quality -0.03 2. Compensation -0.02 3. Discretion 0.00 4. Security -0.02 5. Breadth 3.97 6. Leverage -1.94 7. Turnover 1.02 8. Country (US=1) 0.63 9. NYSE 0.68 10. NASDAQ 0.15 11. OTC 0.09 12. TSX 0.05 13. Tobin-q 1.29 14. Assets (ln) 9.49 15. Capital intensity -1.17 16. Dividends 0.68 17. Establishment size 304.70 18. % Female 63.56 19. Education (yrs.) 13.52 20. Unionization 0.10 21. Telecommunications 0.35 22. Finance 0.17
9. NYSE 10. NASDAQ 11. OTC
8 0.01 -0.01 0.12
Std. Dev.
1
1.50 0.82 0.68 0.81 2.70 24.31 18.30 0.48 0.47 0.36 0.28 0.22 1.79 2.57 1.10 0.47 827.25 23.29 1.69 0.30 0.48 0.38
0.72 0.68 0.58 0.32 0.01 -0.01 0.08 0.13 -0.17 -0.16 0.07 -0.04 0.18 -0.09 0.19 -0.19 -0.18 0.41 0.15 0.18 0.00
9
2
* * * *
0.34 0.04 0.30 0.02 -0.02 0.24 0.13 -0.20 -0.11 0.04 0.03 0.21 -0.16 0.17 -0.09 -0.27 * 0.39 0.19 0.24 0.00
10
-0.62 * -0.45 * -0.13
3
4
5
0.17 0.03 0.04 -0.06 0.05 -0.02 -0.13 0.04 -0.04 0.14 0.01 0.14 -0.02 0.09 0.12 0.03 0.07 0.07
0.27 -0.24 -0.03 0.38 -0.34 -0.30 0.15 -0.02 0.65 -0.18 0.54 -0.15 0.01 0.07 0.26 0.29 0.13
6
7
* *
*
* * *
11
0.10 0.15 -0.05 -0.05 0.01 0.06 -0.11 -0.05 0.05 -0.01 0.00 -0.02 0.08 -0.22 * -0.19 0.32 * -0.03 0.06 -0.08
12
13
* * * * *
* *
* *
14
0.01 -0.11 0.05 0.20 0.04 0.04 -0.02 -0.42 * -0.02 0.03 -0.02 0.07 -0.03 0.40 * 0.03 -0.13 0.05 0.23 * 0.04 0.05 -0.02 0.02 0.04 -0.07 0.08 0.05 -0.02 0.06 -0.04 0.08 0.12
15
16
21
12. TSX 13. Tobin-q 14. Assets (ln) 15. Capital intensity 16. Dividends 17. Establishment size 18. % Female 19. Education (yrs.) 20. Unionization 21. Telecommunications 22. Finance
18. % Female 19. Education (yrs.) 20. Unionization 21. Telecommunications 22. Finance
-0.27 * -0.34 * -0.10 -0.07 0.16 0.04 0.06 -0.06 -0.07 0.06 0.52 * -0.40 * -0.32 * -0.11 -0.30 * -0.08 -0.02 0.11 0.09 -0.04 0.46 * -0.40 * -0.30 * 0.13 0.05 -0.04 0.10 -0.04 -0.07 0.02 0.10 -0.01 -0.09 0.05 -0.03 -0.08 -0.09 0.06 0.13 0.04 0.08 -0.14 -0.10 0.18 0.37 * 0.08 -0.09 -0.03 -0.07 -0.11 0.14 -0.15 -0.05 0.06
17 0.06 -0.12 -0.01 -0.02 -0.07
* p
