Why Do Banks Favor Employee-Friendly Firms? A Stakeholder-Screening Perspective

Cuili Qian (), Donal Crilly (), Ke Wang () and Zheng Wang ()
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Cuili Qian: Naveen Jindal School of Business, University of Texas at Dallas, Richardson, Texas 75080
Donal Crilly: Strategy and Entrepreneurship, London Business School, London NW8 9EJ, United Kingdom
Ke Wang: Department of Accounting, Operations, and Information Systems, Alberta School of Business, University of Alberta, Edmonton, Alberta T6G 2R6, Canada
Zheng Wang: Department of Accountancy, College of Business, City University of Hong Kong, Kowloon, Hong Kong Special Administrative Region

Organization Science, 2021, vol. 32, issue 3, 605-624

Abstract: We investigate why employee-friendly firms often benefit from lower costs of debt financing. We theorize that banks use employee treatment as a screen to assess firms’ trustworthiness, which encompasses not only confidence in firms’ ability to perform well but also the belief that they will act with good intent toward their creditors. We integrate screening theory and stakeholder theory to explain the—oftentimes unintended—consequences that firms’ actions toward employees have on their relationships with other stakeholders. An analysis of U.S. firms between 2003 and 2010 shows that favorable employee treatment reduces the cost of bank loans, and this relationship is stronger when banks cannot infer firms’ intent from their relations with stakeholders other than employees. A policy-capturing study provides further support that employee treatment serves as a screen for intent. We discuss the implications of our stakeholder-screening perspective as a novel way to understand the second-order, unintended effects of a focal stakeholder relationship on firms’ relations with other stakeholders.

Keywords: employee treatment; stakeholder relations; screening theory; bank loans; credit risk (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (9)

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