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Workplace Environment and Payout Policy
Abstract
Firms that encounter lawsuits are subject to unforeseen costs when a case is ruled in favor of the
plaintiff. We examine the impact of lawsuits brought against firms and whether this affects the
firms’ dividend policy, using unique hand-collected datasets of employee litigations and disputes
that include court settlements for employee dispute cases in the United States. We find that lawsuits
lower a firm’s payout ratio, and an increase in lawsuits for a firm lowers the likelihood of the firm
to pay out dividends. The payout ratio also declines for firms following a litigation year: this effect
of a lower payout ratio is more pronounced for smaller firms. These findings provide evidence that
firms adjust their dividend policy when facing employee lawsuits.
JEL Classification: K1, K31, M51, G35
Keywords: Lawsuit, Employee Treatment, Dividend Policy
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I. Introduction
Finance literature has examined the factors that affect a firm’s payout policy, spanning from
taxation, signaling, agency costs, management compensation, to legal implications, one of these
major legal implications being corporate lawsuits. Corporate lawsuits have become a major source
of risk for firms, with a drastic increase in firms paying out court settlements. Firms that face
lawsuits suffer from significant direct costs, which include settlement payments, legal fees, and
indirect costs, such as damage to brand image and reputation (Arena and Ferris, 2016), with
corporate reputation being linked to firm financial performance (Lee and Jungbae Roh, 2012).
Litigation insurance can cover the direct costs of corporate lawsuits. However, the average
litigation insurance is typically capped at $15 million, which is only about 26 percent of the mean
settlement payment (Arena and Julio, 2015). Firms may need to safeguard capital to cover these
costs associated with lawsuits and thus adjust their payout policy to accommodate this need.
One of the main types of corporate litigation that firms are subject to is employee disputes. There
are several types of employee disputes that firms face, which include discrimination, labor law
disputes, injury and death, management negligence, and employee disputes that are more firm-
specific. Discrimination lawsuits, such as gender discrimination, can cost firms hundreds of
millions of dollars, as in the case of AutoZone, who paid $185 million to a female employee who
sued for being demoted after her pregnancy. Employee lawsuits, such as lawsuits regarding wages,
can affect certain types of industries. An example of this is the wave of federal lawsuits for unpaid
wages affecting the restaurant industry in New York City (MacMillan, 2015). Certain types of
processes in a firm can also lead to employee disputes, as in the cases filed against American
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Airlines, Inc., Kroger Co., and Montage Hotels and Resorts LLC, where workers stated that time-
tracking systems were taking away their pay (Feintzeig, 2018).
Firms that face corporate lawsuits suffer from direct costs, such as decreases in profitability, cash
holdings, as well as firm value, which stem from settlement payments, legal damages, and legal
fees (Arena and Ferris, 2016). Litigation insurance can somewhat remedy some of these costs.
Referencing Arena and Ferris (2016), we know that most firms have A-side insurance, which is
personal coverage insurance, and B-side insurance, which is reimbursement coverage insurance
that covers indemnification of directors and executives. Several firms also have C-side insurance,
which protects firms from their own liability, which typically does not have full coverage. Publicly
traded firms from 1996-2006 had a mean litigation coverage limit of $15 million (Towers Perrin
D&O Liability Surveys), which would just cover 26 percent of the average settlement in recent
years (Arena and Julio, 2015). There is a positive relationship between settlement amounts and the
severity of the court case brought against the firm (Cox and Thomas, 2004). There is also a
relationship between the settlement amounts and the extent of losses incurred by shareholders.
Not only do firms face direct costs from corporate lawsuits, they also face indirect costs, which
include decreases in firm credibility, a rise in the uncertainty of the firm’s future, loss of customers
as well as suppliers, and usage of management focus and resources (Arena and Ferris, 2016).
Engelmann and Cornell (1988) conduct five case studies on corporate litigation and find that there
are substantial indirect costs associated with litigation, which implies that the costs of settlement
are higher than the direct costs of litigation.
We believe that employee lawsuits can affect firm performance by damaging employee morale,
losses of customers and stakeholders, as well as an adverse reaction from the stock market and
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shareholders from the expectation of future losses in firm performance and value. Also, firms that
are facing lawsuits may be less likely to hire and maintain a quality workforce, due to quality
candidates preferring to work for firms that have higher levels of corporate social performance
(Greening and Turban, 2000).
Firms that create hostile work environments that incentivize ethically questionable behavior may
be subject to a series of lawsuits. An example of this is Wells Fargo, where six former employees
filed a class action lawsuit seeking $7.2 billion in damages associated with workers being demoted
or fired for refusing to create fake accounts, which followed another class-action lawsuit from
former Wells Fargo employees in California for the firm engaging in a "fraudulent scheme" to
open fake accounts to increase's the firm's share price (Egan, 2016). Also, firms that do not address
the workplace culture that results in discrimination lawsuits being filed against the firm may face
future discrimination lawsuits (Wooten and James, 2004). This also may be the case for other types
of lawsuits.
Studies have found that managers do not like to issue dividends because it reduces the amount of
capital that is under their discretion (Easterbrook, 1984; Jensen, 1986). This may be especially true
for managers that expect future employee disputes and need to hold cash in order to pay out future
court settlements and legal costs. Alternatively, managers may consider issuing more dividends to
appease shareholders prior to negative news being disseminated about employee lawsuits. Firms
are more likely to cut dividends if they are unable to address the earnings shortfall through
modifying discretionary accruals (Daniel, Denis, and Naveen, 2008)1.
1 Discretionary accruals are the accrual component that managers can choose to adjust through U.S. accounting regulations to quantify a firm’s cash flows.
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A firm’s relationship with its stakeholders can affect dividend policy. Strong stakeholders can
choose the firm’s dividend policy in order to mitigate agency problems with weak stakeholders
(Bøhren, Josefsen, and Steen, 2012). Bøhren, Josefsen, and Steen (2012) examine a sample of
Norwegian firms and find that these conflicts are reduced by higher dividend payouts to boost the
firms' reputation in the future. Local firms tend to issue fewer dividends and focus more on local
stakeholders compared to foreign subsidiaries since foreign subsidiaries are motivated to
contribute wealth to the parent company and appease shareholders (Kim and Jeon, 2015)
We examine the impact of lawsuits brought against firms and whether this affects the firms’
dividend policy, using unique hand-collected datasets of employee litigations, allegations,
violations, and disputes that also include court settlements and awards for employee dispute cases
in the United States. Our findings support Chay and Suh (2009), who find that firms who face cash
flow uncertainty will be less likely to issue dividends. Employee lawsuits can bring cash flow
uncertainty to firms, because facing these lawsuits can lead to losses in consumers and
stakeholders, which can affect cash flow uncertainty and, in turn, firms will be hesitant to issue
dividends.
Working with 2,809 unique firms between 2000 and 2014, we first examine the relationship
between lawsuits and payout probability and find that an increase in lawsuits for a firm lowers the
likelihood of the firm to pay out dividends. Next, we examine the case duration and payout ratio.
Our results indicate that the payout ratio declines for firms following a litigation year. Then, we
examine how this affects firms with different characteristics and we find that this effect of a lower
payout ratio is more pronounced for smaller firms. Afterward, we examine a firm's total payout
ratio and find that lawsuits lower a firm's total payout policy. We finally examine alternative
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channels and examine lawsuits and cash holdings. From this, we document that firms react to
lawsuits by increasing cash holdings and that firms hold more cash following a lawsuit.
To our knowledge, the relationship between employee treatment and payout policy has not been
investigated in prior studies. The CSR literature examining CSR and firm payout policy uses
ratings systems, such as KLD (Cheung, Hu, and Schweibert, 2016), Thomson Reuters-ASSET 4
(Samet and Jarboui, 2017), MSCI ESG STATS (Benlemlih, 2018), or the metric of measuring
CSR using the ratio of donation to sales (Kim and Jeon, 2015) to determine the impact of employee
relations on payout policy. Instead, we hand-collect unique datasets of employee lawsuits,
allegations, violations, and complaints which also include court cases brought against firms, with
their subsequent awards and settlements. This allows us to show the direct impact an employee
lawsuit has on the defendant firm and how that affects the firm’s payout policy. Our findings
contribute to the payout literature by helping to explain specific factors that affect a firm's payout
policy. Employee lawsuits as a factor of payout policy are quite relevant with the drastic increase
of employee lawsuits stemming from labor and wage issues, sexual harassment, and
discrimination. The results have implications for investors, management, and stakeholders.
2. Literature Review
2.1 Firm Payout Policy
Several studies examine what affects a firm’s payout policy. DeAngelo, DeAngelo, and Skinner
(2009) provide a survey of corporate payout policy. Baker, Farrelly, and Edelman (1985) discover
that firm officers from multiple industries (utilities, manufacturing, and wholesale/retail) agree
that continuous dividends are vital and that dividend policy influences share value, and that these
officers are familiar with dividend signaling. Brav, Graham, Harvey, and Michaely (2005) survey
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CFOs and Treasurers to determine what the factors are for their payout policy and find that
managers are hesitant to cut dividends and instead of increasing dividends, they use share
repurchases instead, which they consider more flexible. They also find that increases in dividends
and share repurchases are typically paid from residual cash flows after covering the firm's liquidity
and investment needs. Firms may use payout flexibility as a means of operational hedging in order
to avoid financial distress (Bonaimé, Hankins, and Harford, 2013). Testing two agency models on
an international sample of firms, La Porta, Lopez‐de‐Silanes, Shleifer, and Vishny (2000) find
cross-sectional results that support the outcome model, that dividend issues occur from minority
shareholders forcing corporate insiders to distribute cash.
Jagannathan, Stephens, and Weisbach (2000) identify that firms are tending to shift more towards
share repurchases than issuing dividends. DeAngelo, DeAngelo, and Skinner (2004) examine
whether firms are replacing dividends with share repurchases and find that a very small and
concentrated segment of firms are issuing dividends, with the majority of them being industrial
firms. Bodnaruk and Östberg (2013) determine that smaller firms tend to have lower payout ratios
and have higher cash holdings than firms that have a large shareholder base. Fama and French
(2001) discover a trend of firms being less likely to issue dividends. Firms are also holding more
cash, but this trend is concentrated amongst firms that do not pay dividends (Bates, Kahle, and
Stulz, 2009). Institutional investors prefer firms that repurchase shares and, if they invest in firms
that pay dividends, they prefer firms that pay fewer dividends than others (Grinstein and Michaely,
2005). The trend toward share repurchases is prevalent for younger firms, while older firms still
tend to issue dividends (Grullon and Michaely, 2002). Managers consider dividends to be less
flexible than share repurchases, which means that firms that issue dividends will need to continue
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issuing dividends in the future or it will become a negative signal to their shareholders when they
do not receive them (Brav, Graham, Harvey, and Michaely, 2005). Firms repurchase stock for
many reasons, which include benefiting from stock undervaluation and to allocate excess capital,
as well as in specific periods to address stock dilution, adjust leverage ratios, and protect
themselves from takeovers (Dittmar, 2000). Firms reduce corporate payouts when responding to
external financing shocks (Bliss, Cheng, and Denis, 2015). Shareholders may prefer dividend
payments for small distributions, but prefer share repurchases for larger distributions (Brennan and
Thakor, 1990). Alli, Khan, and Ramirez (1993) provide support for the transactional cost/residual
theory, pecking order, and dividends acting as a means of resolving agency problems. Fenn and
Liang (2001) study how managerial incentives affect payout policy and find that there is a strongly
negative relationship between dividends and management stock options. Lambert, Lannen, and
Larcker (1989) find a positive relationship between share repurchases and managerial stock
options. The findings from both of these papers support the argument that the rise of managerial
stock options may explain the increase of share repurchases. Motivated by those studies, we also
investigate the underlying factors of firms' payout policy. Briefly, we examine how a firm’s
relationship with its major stakeholders, employees, influence dividend behavior.
2.2 Labor, Lawsuits, and Payout Policy
Both idiosyncratic risk and systemic risk is a strong determinant of whether firms will issue
dividends (Hoberg and Prabhala, 2009). DeAngelo and DeAngelo (1990, 1991) state that firms
may cut dividends when negotiating collective bargaining with labor unions. Matsa (2006) finds a
negative relationship between union power and dividend policy, but the results are not significant.
When examining union power at the industry-level, firms that are very profitable tend to have
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higher payouts than firms that are not profitable (Chino, 2016). Haw, Hu, Wu, and Zhang (2018)
examine labor laws in 39 countries and see that legislation being passed that strengthens labor
power leads to decreases in firm dividends and total payouts. This negative relationship between
unions and payout policy is also seen when examining the effects of labor union elections on
payout policy, where the passing of a union election drives a decline in the firm’s dividend and
payout ratio (He, Tian, and Yang, 2016).
In the context of litigation and payout policy, Arena and Julio (2011) examine litigation risk and
corporate financial policy and find that firms that face higher litigation risk are more likely to hold
more cash in order to cover litigation costs as well as adopt a more conservative capital structure.
Chay and Suh (2009) find that, when firms face cash flow uncertainty, they are less likely to issue
dividends. Firms that have stronger labor power tend to engage in fewer share repurchases unless
the firm is engaging in share repurchases as an antitakeover or to prevent dilution of employee
stock options (Chen, Chen, and Wang, 2015). Corporate social performance can also act as an
insurance mechanism for firms that face higher litigation risk, by building, "positive moral capital
among its stakeholders" (Koh, Qian, and Wang, 2014). Firms that have higher corporate social
performance have lower financial risk (Orlitzky and Benjamin, 2001).
When studying higher employee protection and firing costs, firms will engage in share buybacks
to prevent transfer of shareholder wealth to workers (Dang, de Cesarib and Phanc, 2018). Ahmad,
Beuselinck, and Bollaert (2017) study a sample of OECD firms and find that an increase in labor
protection leads to a lower total dividend payout for firms in their sample. This finding supports
the flexibility hypotheses, which states that employee protection legislation adversely affects firms
that suffer from constrained resources, as well as firms that have larger operating leverage. Our
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study contributes to the literature on examining how labor-related lawsuits, as well as employee
treatment, affects firm-level policies.
3. Hypothesis Development
There has been a rising trend of firms facing employee lawsuits, which has resulted in numerous
settlements. Litigation under labor laws has drastically risen since 2000 (DePillis, 2015). There
were over 7,000 collective actions regarding wage and hour violations filed with federal courts in
2011, which is an approximate 400 percent increase from 2000 (Segal, 2012)2. Over 3,500 federal
civil lawsuits related to harassment were filed in 2017, an increase from 3,288 in 2016 and such
lawsuits are at their highest level since 2012 (Lee, 2017). The ten largest worker treatment class-
action suits were up to $2.72 billion in 2017, from $1.75 billion in 2016 (Lublin, 2018). Employee
lawsuits can affect firm performance by providing a negative signal to the market, shareholders,
potential job candidates, customers, and other stakeholders. The number of employee lawsuits that
a firm faces is included in corporate social responsibility metrics, such as KLD (now MSCI) and
can affect an investor’s decision to purchase or sell firm shares, especially for socially responsible
investors.
3.1 Cost of Litigation and Potential Impact on Payout Policy
We believe that the cost factor associated with labor litigations can cause a severe threat to the
business. For example, ten former employees filed a civil rights lawsuit in the U.S. District Court
of Virginia against McDonald’s for racism, sexual harassment, and wrongful termination, alleging
2 A collective action is a type of class action lawsuit that is brought by a group of employees under the Fair Labor and Standards Act (which sets the levels for minimum-wage and overtime pay) who were not paid what was owed due to being misclassified, from being exempt from overtime, or were properly classified but not paid the time they worked.
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that the firm fired a dozen black employees that “didn’t fit the profile” they wanted (Horovitz,
2015). A former employee sued Best Buy for $1 million for their anti-shoplifting program that
discriminated against racial and ethnic minorities (Stych, 2011). Darden Restaurants faced a
lawsuit regarding a manager being fired after reporting being sexually harassed at work
(Brinkmann, 2016). A jury awarded $185 million to a former Autozone employee who was
demoted after her pregnancy (Pfeifer, 2014). Costco was sued for a second time by a former
employee for being subjected to a hostile work environment for being gay and HIV-positive and
then sued the second time for him not being given his job back (NBC Los Angeles, 2009). General
Mills is facing a second age discrimination lawsuit, claiming that layoffs were skewed towards
older employees (Crosby, 2016). Former American International Group employees were awarded
a $450 million settlement due to the firm "underreporting premiums on workers' compensation
policies", which happened since the 1980s (Reuters, 2011). Tyson Foods Inc. agreed to a $2 million
settlement over whether hourly-paid workers should be paid for the time they got into and out of
their work clothes (Kilman, 2011).
Gormley and Matsa (2011) found that firms facing legal liability risk from workers being exposed
to carcinogens tended to acquire firms that had high operating cash flows. This is a means for
management to diversify their risk as well as protect their personal exposure to the negative returns
from these adverse shocks to the share price. This strategy of holding cash to remedy declines in
share price may also hold true for when firms face other types of employee lawsuits.
Given the negative impact corporate lawsuits have on firm value and performance, we hypothesize
that lawsuits lower a firm's payout ratio due to the firm preparing to cover for costs associated with
the lawsuit, which includes legal fees, court awards and/or settlements and the losses from
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consumers and stakeholders. Arena and Julio (2011) examine litigation risk and find that firms
store cash to cover anticipated litigation costs by decreasing capital expenditures. This leads us to
our regression model below:
Payout Ratio = Lawsuit + Σ Controls (1)
In this model, we regress the payout ratio on the log transformation of the total number of lawsuits,
such as Log(Lawsuit), by controlling a set of firm-level control variables. For other variables, we
mostly follow Francis, Hasan, John, and Song (2011). First, we create Treat * Post Years to
measure how firms adjust their dividend policy after they face litigations. Treat is a binary variable
and equal to one if the firm is facing an employee allegation, zero otherwise. Post Years is equal
to one for all the years after the firm is charged in an employee dispute. Our control variables
include three sets. The first set is firm-level control variables, namely, market-to-book ratio, asset
growth, ROA, firm size, retained earnings to total capital, idiosyncratic risk, and cash holding. The
second set is labor and employment-related variables, specifically: percentage of industry
unionization, percentage of unionization at the state level, percentage of unionization growth at an
industry, personnel intensity, property, plants, and equipment. The last set includes corporate
governance-related variables, i.e., leverage, investment ratio, tax, institutional holding, and
takeover index (to conserve space, we report those variables as GOV. Controls in our regressions).
In each regression, we first control for firm- and labor-related control variables. We then add
governance-related variables, following Francis, Hasan, John, and Song (2011), to reduce any
omitted variable bias. Detailed definitions of the variables are in the appendix. We perform year
and industry fixed effects, year and state (location) fixed effects, year and firm fixed effects to
eliminate any unobserved heterogeneity. We also cluster standard errors at the firm level.
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4. Data
We use the S&P Capital IQ database to collect the financial information of US publicly traded
firms between 2000 and 2014. Our sample has 10,042 unique firms after excluding financial firms
and utility firms. Our lawsuit data is gathered from two sources. First, we hand-collect labor- and
employment-related lawsuits from the National Labor Relations Board database. We obtain 34,955
unique cases, along with charging parties and case outcomes.3 For robustness of our results, we
also introduce different work-related disputes that proxy for litigation. We obtain unique hand-
collected labor enforcement datasets from the US Department of Labor.4 Those datasets include
Occupational Safety and Health Administration (OSHA) enforcement data, Wage and Hour
Compliance Action Data, and Employee Benefits and Security Enforcement Data. Finally, we also
collect, from S&P Capital IQ, data on discrimination lawsuits that are filed against firms by
employees, lawsuit announcements and news releases, which include settlement amounts, legal
fees, and attorney fees.
5. Findings
5.1 Summary Statistics
Table 1 documents the summary statistics in our sample. Panel A documents the lawsuit variables
used in this study. From Panel A, we show that firms can face as many as 224 lawsuits in a year,
while cases can take up to 3,461 days to conclude. Charging Party data indicates that 67% of the
cases are filed by labor unions, while 33% are filed by individual employees. The ‘treat’ variable
documents that 20% of the firms in our sample are facing at least one lawsuit. Panel B documents
3 https://www.nlrb.gov/news-outreach/graphs-data/recent-filings 4 US Department of Labor Enforcement Data: http://ogesdw.dol.gov/views/data_catalogs.php
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additional employee disputes in our study. Panel C exhibits payout variables used in our work,
while Panel D exhibits control variables utilized in our work.
5.2 Employee Lawsuits and Payout Ratio
In Table 2, we examine the relationship between lawsuit and payout ratio. From column (1) to (6),
our results indicate that lawsuits lower payout ratios. We find that the increase in the number of
litigations lowers a firm’s dividend payments. These initial results may support our hypothesis that
firms facing lawsuits reduce their payout ratio due to having to cover costs associated with
employee lawsuits. Arena and Julio (2011) find that firms who face litigation hold more cash and
reduce capital expenditures. Our findings support that firms hold cash to cover future litigation
costs, but they reduce their payout ratio instead.
5.3 Employee Lawsuits and Payout Probability
We measure the relationship between lawsuit and payout probability. ‘Payout likelihood’ is a
binary variable and equal to one if the firm is paying dividends, and zero otherwise. We control
for the same variables as in Panel A following the same order, but only report the variable of
interest to conserve space. We find that an increase in lawsuits lowers the likelihood of a firm
paying dividends. This supports our hypothesis that employee lawsuits affect a firm’s dividend
policy. Employee lawsuits bring additional uncertainty of the future performance of the firm,
which is associated with the firm having to pay both the direct and indirect costs of the impending
lawsuit. Our results support this when finding that firms that face lawsuits have a lower probability
of issuing dividends. This supports Chay and Suh (2009), who find that firms who face cash flow
uncertainty will be less likely to issue dividends.
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5.4 Case Duration and Payout Ratio
There is a possibility that our results are capturing pre-existing trends in a firm’s dividend policy.
To address this, we examine the case duration and payout ratio. In table 3, Panel A, we find that
an increase in case duration (case closure date minus case opening date) lowers the payout ratio.
We include charging party in column 2 of panel A. Charging party is equal to one if the case is
filed by a union, and zero otherwise. These results show that union filed cases lower dividends
more than individual employee-filed cases. This finding is important, because it adds to the
literature on the relationship between union activities and firm performance (Bradley, Kim, and
Tian, 2016; Chu, Cozzi and Furakawa, 2016; Xing, Howe, Anderson and Yan, 2016). Labor unions
can impact a firm’s cash holdings (Klasa, Maxwell, and Ortiz-Molina, 2009). Our results build
upon the findings in He, Tian, and Yang (2016), who state that unionization lowers a firm’s
dividend ratio. According to He, Tian, and Yang (2016) this more pronounced effect of
unionization lowering a firm’s dividend ratio may be due to firms needing to hold more cash for
operating flexibility, so that the firm can invest in profitable projects, and accommodate union
demands, such as better working conditions, wages, maintaining plant operations, and fewer
layoffs.
In Panel B, we perform a difference-in-difference test. ‘Treat’ is a binary variable, equal to one if
the firm is being sued. We create ‘lawsuit_before’, which is years before (-1, -2) and years after
(+1, +2) a lawsuit. We show that the firms’ payout ratio goes down following the litigation year.
If prior trends in a firm’s dividend policy are present, then ‘lawsuit_before’ should be both negative
and significant. These results provide support that our initial findings are not endogenous and do
not stem from a firm's previous trends of dividend policy.
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5.5 Corporate Governance Characteristics
We also examine whether smaller firms are more affected by employee lawsuits. Smaller firms
have smaller workforces and less access to capital so that these firms may be impacted more by
employee lawsuits. Table 4 shows our measurements of the firm’s corporate governance
characteristics. ‘Treat’ is a binary variable for lawsuit firms. ‘Post Years’ is all of the years after a
firm is sued. ‘Small firm’ is a binary variable which indicates whether the firm size is smaller than
the sample median. We document that the effect of lowered payout ratio is more pronounced for
smaller firms. This is consistent with our hypothesis that firms reduce their payout policy to reserve
capital to cover impending litigation costs. This would be more pronounced for smaller firms, who
are more limited in raising capital and hence need to safeguard capital even more than larger firms,
thus reducing their payout policy more than larger firms.
5.6 Employee Lawsuits and Total Payout Ratio
Grullon and Michaely (2002) state that firms may have gradually transitioned from dividend issues
to share repurchases over time, while DeAngelo, DeAngelo, and Skinner (2004) state that the
supply of dividends is concentrated in a small number of firms. Thus, the decline in dividend issues
may stem from firms replacing dividend issues with share repurchases. Rakotomavo (2012)
examines the effect of firm CSR activities and dividend payout and finds that CSR activities do
not diminish dividend payout but, actually, firms that engage in CSR activities tend to be larger,
more profitable, and tend to increase their dividend issues. Samet and Jarboui (2017) state that a
firm’s payout policy may be influenced by the firm’s adoption of CSR strategies and find that
firms who adopt CSR strategies are more likely to increase their payout level, which includes both
dividends and share repurchases. They also find that firms with high levels of CSR tend to prefer
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share repurchases and that socially responsible firms tend to consider dividends and share
repurchases as substitutable. Benlemlih (2018) finds that firms with a high CSR rating pay more
dividends that are more stable than firms with low CSR ratings and that firms that are socially
irresponsible modify their dividends faster than firms that are socially responsible. In contrast,
Cheung, Hu, and Schwiebert (2016) find no significant relationship between CSR and dividend
propensity, which means that CSR activities do not influence the decision on whether a firm will
pay dividends or not, but do affect what dividends to pay.
To address this matter of whether employee lawsuits influence a firm’s payout policy, we examine
a firm’s “total payout ratio” which is the sum of dividend and share repurchases to earnings. Our
results shown in Table 5 reflect that lawsuits lower the total payout ratio. This is important because
the "total payout ratio" includes share repurchases. These results reflect that employee lawsuits
affect overall payout policy and firms are not just replacing dividend issues with share repurchases.
This is due to firms having to use cash holdings to cover costs associated with lawsuits instead of
issuing payouts in either dividends or share repurchases
In Panel B of Table 5, we use the dependent variable, Payout Through Repurchases, which reflects
the fraction of the total payout that is paid out through share repurchases. Specifically, we test
whether employee lawsuits may influence managers' preference for share repurchases rather than
dividend payments. The results of this calculation provide further support for our initial findings:
employee lawsuits decrease managers’ incentive for paying dividends and operating share
repurchase programs. Our results are consistent with Rakotomavo (2012).
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In Panel C, we test how employee litigations affect dividend forecast “ERROR”. We follow
Grullon and Michaely (2002), who posit that dividend policy is a function of targeted payout policy
and the speed of adjustment of current dividends.
𝐸𝑅𝑅𝑂𝑅𝑖,𝑡 =[∆ 𝐷𝐼𝑉𝑖,𝑡 − ( 𝛽1,𝑖 + 𝛽2,𝑖 𝐸𝐴𝑅𝑁𝑖,𝑡 + 𝛽3,𝑖 𝐷𝐼𝑉𝑖.𝑡−1)]
𝑉𝑀𝑖,𝑡−1 (2)
In this equation, ∆ 𝐷𝐼𝑉𝑖,𝑡 is the change in the dividend, 𝐸𝐴𝑅𝑁𝑖,𝑡 is the earnings of the firm, and
𝑉𝑀𝑖,𝑡−1 is the market value of equity of the firm. We regress ERROR on share repurchases as well
as the employee lawsuit binary variable interacted with share repurchases. We find a negative
correlation between share repurchases and ERROR, which indicates that share repurchases and
dividend payments are substitute payout methods. We also document a negative interaction term
of lawsuit and repurchases, which suggests that the substitution effect is less pronounced among
firms with employee lawsuits. We document that the negative effect of repurchase payouts on
dividend forecast error becomes weaker when employee lawsuits are filed. That is, dividend
payments and share repurchases seem to be less substitutable among firms that are frequently sued
by their employees. Overall, the results from Table 5 suggest that employee lawsuits do not
moderate the relationship between dividends and share repurchases. Costly allegations can weaken
the substitution effect.
5.7 Employee Lawsuits and Free Cash Flow
An issue may arise where firms increase dividends before a court filing, to appease shareholders
who are focused on a short-time horizon and then, after the case, cut dividends. In order to address
this, we separate our sample into two subsamples and use a proxy for the severity of the free cash
flow problem. We reference Francis, Hasan, John, and Song (2011) and use an interaction term
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Treat*Post Case and the dummy variable Low Free Cash Flow Problem, where the variable is
equal to 1 if the firm is above the Market-to-Book Ratio sample median value and below the Cash
Flow sample median value in the specified year and 0 otherwise. These variables are incorporated
into the regression. Our results are reflected in Table 6.
The coefficient of the interaction term is negative and significant, which suggests that the
regression coefficients of Treat*Lawsuit are significantly different across these two subsamples.
From this, we can conclude that lawsuits have a more significant effect on cash distributions,
particularly dividends, when there is a more severe cash flow problem. It is less probable that the
firms were reducing investment before the lawsuit. Therefore, our results suggest that firms did
not cut dividends to satisfy shareholders.
5.8 Employee Lawsuits and Cash Holdings
Firms hold more cash in order to prepare for covering the imminent costs associated with an
employee lawsuit. This may be especially true after the lawsuit, because the firm will need to pay
settlement costs to the plaintiff and legal costs to the lawyers representing the firm. Swanson
(2006) states that "Corporations hold cash for several important reasons: (1) to pay for a firm’s
obligations, (2) to take immediate advantage of business opportunities (Baskin, 1987), and (3) to
provide for self-insurance against unknown hazards.” Firms who have leaner cash holdings tend
to generate higher returns, especially for firms with negative earnings growth and loss firms
(Swanson, 2006). This corresponds with our finding that, typically, it is not in a firm's best interest
to hold cash. This occurs because of the need to cover the costs associated with employee lawsuits.
Firms hold cash in order to cover anticipated settlements and costs associated with securities class
action litigation (Arena and Julio, 2015). McTier and Wald (2011) add to this and find that,
Paper #840340
following a securities class action lawsuit, firms decrease payouts and increase cash holdings, as
well as increase leverage and firm-specific risk. Our results in Panel A of Table 7 reflect that firms
similarly hold cash for employee lawsuits. Our results support Malm and Kanuri (2017), who find
that increases in litigation risk lead to increases in a firm’s cash holdings and find a positive
relationship between cash holdings and labor violations.
We repeat our main regression by considering the leverage ratios of the firm. This is important,
given the fact that firms may be constrained in issuing dividends due to debt covenants (Qi and
Wald, 2008). To address this, we use the control variable ‘Leverage’ in all our regressions.
However, firms may be borrowing money to cover legal allegations which could alter their
dividend payout ratios. To alleviate that concern, we repeat the main regression, but use firms that
have below median debt ratios, which are less susceptible to this debt covenant effect. Our results
still hold in Table 7 in Panel B.
5.9 Robustness Checks
In this section of our study, we run further tests to confirm our initial findings. First, we re-run our
main regressions by creating a matched sample, with our results reflected in Table 8. In Panel A,
we match each lawsuit firm to a non-lawsuit firm based on ‘size (total assets)’ and ‘booktomarket’.
We find that litigation lowers payout ratios. Also, firms have a lower payout ratio in the years
following litigation. In Panel B, we match our sample based on the number of employees and
book-to-market. Consistent with expectations, we document that employee lawsuits are negatively
related to the dividend payout ratio.
Next, we use alternative dividend payout definitions, measured as, a) dividend as a percentage of
the book value of total assets, and b)the ratio of dividends to the market value of assets, as an
Paper #840340
additional robustness check. In Table 9, we show that a specific payout ratio definition does not
bias our results.
Afterward, we use other employee disputes that proxy for litigations, which can be seen in Table
10. We use the log transformation of total wage-related cases, log transformation of total penalties
for wage-related allegations, log transformation of total OSHA inspections, log transformation of
discrimination cases, log transformation of total settlement amounts, and log transformation of
total attorney fees. They all lower payout ratios. Legal violations can affect firm value, as seen
with OSHA citations in Fry and Lee (1989), as well as labor violations. Equal Employment
Opportunity violations lead to losses in equity value that exceed the amounts of the settlement
costs of the violation, which may stem from the added costs of the firms in altering their
employment practices or the publicity of firm management exposed by the court case (Hersch,
1991). In Table 10, we document that the number of wage-related cases and wage-related penalties
lower firms’ payout ratio. We also show that OSHA inspections and discrimination cases are
negatively and significantly related to dividend payout ratios. Finally, we find that the direct cost
of lawsuits (settlement costs and attorney costs) yield lower levels of dividends. Our results are
robust to alternative employee disputes, violations, complaints, and allegations.
Additionally, there may be state-level factors that influence a firm's dividend policy. An example
is state laws that require a minimum asset-to-debt ratio in order to issue a payout (Qi and Wald,
2008). To address any time-variant state-level effects, in Table 11, we incorporate a state
incorporation dummy variable into the regression. In Panel A, we perform state and year fixed
effects based on the state of incorporation (some states may have better laws for employee
protections, so states should be checked individually). In Panel B, we perform year and fixed
Paper #840340
effects to eliminate any unobserved heterogeneity. Our results remain relatively constant; firms
tend to reduce the number of payouts as they face employee allegations.
6. Conclusion
In this paper, we examine whether employee lawsuits affect a firm’s dividend policy. We use a
series of unique datasets, which are NLRB lawsuits, the U.S. Department of Labor work-related
allegations, and S&P Capital IQ discrimination lawsuits and news releases that contain lawsuits
and court settlements for U.S. firms over a time span of 15 years from 2000 to 2016. Our results
indicate that lawsuits lower a firm’s payout ratio; an increase in lawsuits for a firm lowers the
likelihood of the firm paying out dividends; and the firm’s payout ratio declines following a
litigation year. This act of lowering the firm’s payout ratio is more pronounced for smaller firms.
Also, we find that firms increase their cash holdings when faced with a lawsuit and hold more cash
following the lawsuit. Our findings contribute to the current literature by examining whether firms
adjust their payout policy when facing employee lawsuits.
Paper #840340
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Paper #840340
Table 1
Summary Statistics
Variables Mean Std.Dev Min Max
Panel A. Lawsuit Variables
Total Case 0.88 3.46 0.00 224.00
Duration 195.55 292.28 0.00 3,461.00
Charging Party 0.67 0.47 0.00 1.00
Treat 0.20 0.34 0.00 1.00
Panel B. Other Disputes Wage Case 11.00 32.00 0.00 34.00
Wage Amount 4,335.00 234,248.80 0.00 33,300,000.00
Inspection 1.03 4.58 0.00 189.00
Discrimination Case 0.07 0.53 0.00 19.00
Settlement Fees 28,992.00 1,545,677.00 0.00 193,000,000.00
Attorney Fees 1,088.00 93,445.78 0.00 12,600,000.00
Panel C. Payout Variables Payout Ratio 0.22 0.21 0.00 0.99
Dividend Probability 0.45 0.34 0.00 1.00
Total Payout Ratio 0.31 0.22 0.00 0.96
Dividend Payout Ratio (II) 1.21 1.64 0.00 2.98
Dividend Payout Ratio (III) 0.88 1.01 0.00 2.41
Payout Through Repurchases 1.82 1.76 0.00 99.01
ERROR -0.01 0.02 -0.10 0.09
Panel D. Payout Variables MtB 1.55 1.24 0.44 10.02
Asset Growth 0.02 0.16 -0.33 0.78
ROA 0.05 0.08 -0.14 0.21
Firm Size 0.23 0.41 0.05 1.00
Ret. Earnings to Tot. Cap. 0.39 0.22 -0.79 0.90
Idiosyncratic risk 0.03 0.02 0.01 0.11
Cash Holding 0.11 0.14 0.00 0.47
%Ind. Unionization 6.69 4.57 1.21 18.00
%State Union 5.77 4.42 0.80 17.30
%Union Growth 0.05 0.67 -1.42 1.40
Personal intensity 0.07 0.01 0.00 0.10
Property, plants and equip. 0.11 0.01 0.00 0.69
Leverage 0.23 0.91 0.00 10.67
Investment 0.08 0.07 0.00 0.36
Tax 0.22 0.11 0.05 0.47
Inst. Ownership 0.69 0.21 0.01 1.00
Takeover Index 0.17 0.09 0.01 0.81
Table 1 exhibits the summary statistics at firm level. Panel A represents the employee lawsuit
characteristics at firm level. Panel B represents other employee disputes. Panel C exhibits
payout variables. Panel D exhibits the firms level control variables used in the study. Detailed
definitions of variables are reported in the appendix.
Paper #840340
Table 2
Effects of Employee Lawsuits on Dividend Policy
Panel A. Dependent Variable
Payout Ratio
Sample
(1) (2) (3) (4) (5) (6)
Log(Lawsuit) -0.298 -0.167 -0.419 -0.167 -0.773 -0.217
[0.001]*** [0.001]*** [0.011]** [0.001]*** [0.022]** [0.019]**
MtB 0.001 0.002 0.021 0.001 0.022 0.012
[0.001]*** [0.001]*** [0.001]*** [0.001]*** [0.001]*** [0.001]***
Asset Growth -0.531 -0.045 -0.534 -0.045 -0.200 -0.350
[0.001]*** [0.001]*** [0.001]*** [0.001]*** [0.001]*** [0.001]***
ROA -2.988 -0.364 -2.807 -0.364 -0.519 -0.686
[0.001]*** [0.044]** [0.001]*** [0.039]** [0.001]*** [0.051]*
Firm Size 0.093 0.653 0.876 0.653 0.674 0.539
[0.044]** [0.114] [0.084]* [0.032]** [0.112] [0.044]**
Ret. Earnings to Tot. Cap. 0.002 0.002 0.002 0.002 0.002 0.002
[0.011]** [0.001]*** [0.066]* [0.051]* [0.001]*** [0.033]**
Idiosyncratic risk -2.702 -2.093 -2.811 -2.093 -2.831 -2.940
[0.001]*** [0.001]*** [0.001]*** [0.001]*** [0.001]*** [0.001]***
Cash Holding 1.934 1.678 1.299 1.678 1.949 1.340
[0.069]* [0.074]* [0.089]* [0.055]* [0.079]* [0.092]*
%Ind. Unionization -3.615 -3.796 -3.910 -3.796 -3.774 -3.751
[0.001]*** [0.001]*** [0.001]*** [0.001]*** [0.001]*** [0.001]***
%State Union -2.316 -2.445 -2.561 -2.445 -2.427 -2.380
[0.313] [0.441] [0.543] [0.677] [0.411] [0.113]
%Union Growth -1.875 -1.803 -1.844 -1.803 -1.819 -1.799
[0.033]** [0.115] [0.056]* [0.039]** [0.041]** [0.083]*
Personal intensity 0.009 0.009 0.009 0.009 0.009 0.009
[0.793] [0.792] [0.793] [0.792] [0.786] [0.782]
Property, plants and equip. 1.227 1.246 1.822 1.246 1.445 1.716
[0.500] [0.470] [0.467] [0.470] [0.464] [0.478]
Leverage -0.563 -0.523 -0.563 -0.054 -0.531
[0.150] [0.173] [0.097]* [0.122] [0.113]
Investment 0.791 0.906 0.011 0.467
[0.741] [0.757] [0.738] [0.766]
Tax -0.101 -0.100 -0.100
[0.001]*** [0.001]*** [0.001]***
Inst. Ownership 0.027 0.664
[0.001]*** [0.001]***
Takeover Index 0.366
[0.021]**
Paper #840340
Industry/Year YES YES YES YES YES YES
N 61,870 61,870 61,870 61,870 61,870 61,870
R2 8% 8% 8% 9% 9% 10%
Panel B.
Dependent Variable
Dividend Probability
Sample
(1) (2) (3) (4) (5) (6)
Log(Lawsuit) -0.292 -0.244 -0.283 -0.278 -0.284 -0.214
[0.001]*** [0.001]*** [0.001]*** [0.001]*** [0.001]*** [0.001]***
CONTROLS YES YES YES YES YES YES
Industry/Year YES YES YES YES YES YES
N 61,870 61,870 61,870 61,870 61,870 61,870
R2 21% 21% 22% 22% 23% 24% Table 2 reports the multivariate regression results between employee lawsuits and payout policy controlling for firm-level
variables. In Panel A, from column (1) to column (6), our dependent variable is payout ratio. In Panel B, we measure the payout
likelihood where our dependent variable is firm paying dividend, one, or zero otherwise. Std. errors are clustered at firm level.
Detailed definitions of variables are reported in the appendix. *, **, and *** indicate statistical significance at the 10%, 5%,
and 1% levels, respectively
Paper #840340
Table 3
Lawsuit Characteristics, Lawsuit Timing, and Dividend Policy
Panel A.
Dependent Variable
Payout Ratio
Sample
(1) (2)
Duration -0.321
[0.001]*** Charging Party -0.901
[0.044]**
CONTROLS YES YES
Industry/Year YES YES
N 34,955 34,955
R2 15% 17%
Panel B.
Dependent Variable
Payout Ratio
Sample
(1) (2)
Treat * Lawsuit_Before(-2) 0.344 0.122
[0.877] [0.816]
Treat * Lawsuit_Before(-1) -0.445 -0.902
[0.990] [0.667]
Treat * Lawsuit_Before(0) 0.334 -0.334
[0.556] [0.112]
Treat * Lawsuit_Before(+1) -0.401 -0.433
[0.044]** [0.019]**
Treat * Lawsuit_Before(+2) -0.341 -0.221
[0.012]** [0.001]***
CONTROLS YES YES
GOV. CONTROLS NO YES
Industry/Year YES YES
N 56,778 56,778
R2 13% 15% Table 3 reports the multivariate regression results between employee lawsuits and payout policy controlling for firm-level
variables. In Panel A, from column (1) to column (2), our dependent variable is payout ratio. In Panel B, we measure the timing
of lawsuit where our dependent variable is payout ratio. Std. errors are clustered at firm level. Detailed definitions of variables
are reported in the appendix. *, **, and *** indicate statistical significance at the 10%, 5%, and 1% levels, respectively
Paper #840340
Table 4
Effects of Filing of Employee Lawsuit on Dividend Policy for Firms with Different Characteristics
Panel A.
Dependent Variable
Payout Ratio
Sample
(1) (2) (3) (4)
Treat * PostLawsuit -0.033 -0.321 -0.400 -0.221
[0.001]*** [0.001]*** [0.001]*** [0.001]***
Treat * PostLawsuit * Small Firm -0.901 -0.455
[0.044]** [0.030]**
CONTROLS YES YES YES YES
GOV. CONTROLS NO YES NO YES
Industry/Year YES YES YES YES
N 61,870 61,870 61,870 61,870
R2 21% 22% 22% 23% Table 4 reports the multivariate regression results between employee lawsuits and payout policy controlling for firm-level
variables. In Panel A, from column (1) to column (4), our dependent variable is payout ratio. Std. errors are clustered at firm
level. Detailed definitions of variables are reported in the appendix. *, **, and *** indicate statistical significance at the 10%,
5%, and 1% levels, respectively
Paper #840340
Table 5
Effects of Filing of Litigation Filing on Total Payout Ratio
Panel A.
Dependent Variable Total Payout Ratio
Sample
(1) (2) (3) (4)
Log(Lawsuit) -0.331 -0.945
[0.001]*** [0.047]** Treat * PostLawsuit -0.677 -0.301
[0.001]*** [0.001]***
CONTROLS YES YES YES YES
GOV. CONTROLS NO YES NO YES
Industry/Year YES YES YES YES
N 61,870 61,870 61,870 61,870
R2 14% 15% 12% 13%
Panel B.
Dependent Variable Payout Through Repurchases
Sample
(1) (2) (3) (4)
Log(Lawsuit) -0.552 -0.009
[0.041]** [0.077]* Treat * PostLawsuit -0.112 -0.309
[0.001]*** [0.001]***
CONTROLS YES YES YES YES
GOV. CONTROLS NO YES NO YES
Industry/Year YES YES YES YES
N 61,870 61,870 61,870 61,870
R2 14% 15% 15% 16%
Panel C.
Dependent Variable ERROR
Sample
(1) (2) (3) (4)
Repurchase -0.002 -0.001 -0.002 -0.001
[0.001]*** [0.001]*** [0.001]*** [0.001]***
Treat -0.021 -0.013
[0.081]* [0.081]*
Repurchase * Treat -0.112 -0.103
[0.031]** [0.001]***
CONTROLS YES YES YES YES
GOV. CONTROLS NO YES NO YES
Industry/Year YES YES YES YES
N 61,870 61,870 61,870 61,870
R2 13% 14% 10% 11%
Table 5 reports the multivariate regression results between employee lawsuits and payout policy controlling for firm-level variables.
In Panel A, from column (1) to column (4), our dependent variable is total payout ratio. In Panel B, our dependent variable is payout
through repurchases. In Panel C, our dependent variable is dividend forecast ERROR. Std. errors are clustered at firm level. Detailed
definitions of variables are reported in the appendix. *, **, and *** indicate statistical significance at the 10%, 5%, and 1% levels,
respectively
Paper #840340
Table 6
Effects of Filing of Litigation Filing on Dividend Ratio for Firms with Cash Flow Problems
Panel A.
Dependent Variable
Payout Ratio
Sample
(1) (2) (3) (4)
Treat * PostLawsuit * Low Free CF -0.089 -0.002 -0.012 -0.031
[0.047]** [0.039]** [0.043]** [0.056]*
Treat * Low Free CF -0.899 -1.221
[0.001]*** [0.001]***
CONTROLS YES YES YES YES
GOV. CONTROLS NO YES NO YES
Industry/Year YES YES YES YES
N 61,870 61,870 61,870 61,870
R2 22% 22% 21% 22% Table 6 reports the multivariate regression results between employee lawsuits and payout policy controlling for firm-level
variables. In Panel A, from column (1) to column (4), our dependent variable is payout ratio. Std. errors are clustered at firm level.
Detailed definitions of variables are reported in the appendix. *, **, and *** indicate statistical significance at the 10%, 5%, and
1% levels, respectively
Paper #840340
Table 7 Effects of Filing of Litigation Filing on Dividend Ratio : Alternative Explanations
Panel A.
Dependent Variable
Cash Holding
Sample
(1) (2) (3) (4)
Log(Lawsuit) 0.039 0.453
[0.001]*** [0.001]*** Treat * PostLawsuit 0.093 0.101
[0.029]** [0.031]**
CONTROLS YES YES YES YES
GOV. CONTROLS NO YES NO YES
Industry/Year YES YES YES YES
N 61,870 61,870 61,870 61,870
R2 22% 22% 23% 23%
Panel B.
Dependent Variable
Leverage Dropped
Sample
(1) (2) (3) (4)
Log(Lawsuit) -0.331 -0.945
[0.001]*** [0.047]** Treat * PostLawsuit -0.677 -0.301
[0.001]*** [0.001]***
CONTROLS YES YES YES YES
GOV. CONTROLS NO YES NO YES
Industry/Year YES YES YES YES
N 35,778 35,778 35,778 35,778
R2 21% 22% 21% 22% Table 7 reports the multivariate regression results between employee lawsuits and payout policy for alternative explanations
controlling for firm-level variables. In Panel A, from column (1) to column (4), our dependent variable is firms’ total cash
holding. In Panel B, our dependent variable payout policy, but we drop firms if they have leverage above the sample median.
Std. errors are clustered at firm level. Detailed definitions of variables are reported in the appendix. *, **, and *** indicate
statistical significance at the 10%, 5%, and 1% levels, respectively
Paper #840340
Table 8 Effects of Filing of Litigation Filing on Dividend Ratio: Alternative Samples
Panel A.
Dependent Variable AT - BTM Matched
Payout Ratio
Sample
(1) (2) (3) (4)
Log(Lawsuit) -0.209 -0.331
[0.001]*** [0.001]*** Treat * PostLawsuit -0.277 -0.409
[0.001]*** [0.031]**
CONTROLS YES YES YES YES
GOV. CONTROLS NO YES NO YES
Industry/Year YES YES YES YES
N 8,802 8,802 8,802 8,802
R2 17% 17% 18% 18%
Panel B.
Dependent Variable EMP-BTM Matched
Payout Ratio
Sample
(1) (2) (3) (4)
Log(Lawsuit) -0.778 -0.709
[0.001]*** [0.001]*** Treat * PostLawsuit -0.099 -0.103
[0.001]*** [0.001]***
CONTROLS YES YES YES YES
GOV. CONTROLS NO YES NO YES
Industry/Year YES YES YES YES
N 8,802 8,802 8,802 8,802
R2 17% 17% 19% `19 Table 8 reports the multivariate regression results between employee lawsuits and payout policy for matched sample, controlling
for firm-level variables. In Panel A, from column (1) to column (4), our dependent variable is payout ratio where we match our
sample based on total asset and book to market. In Panel B, our dependent variable payout policy, and we match our sample
based on number of employee and book to market. Std. errors are clustered at firm level. Detailed definitions of variables are
reported in the appendix. *, **, and *** indicate statistical significance at the 10%, 5%, and 1% levels, respectively
Paper #840340
Table 9 Effects of Filing of Litigation Filing on Dividend Ratio : Alternative Dependent Variables
Panel A.
Dependent Variable
Dividend Payout Ratio (II)
Sample
(1) (2) (3) (4)
Log(Lawsuit) -0.677 -0.188
[0.039]** [0.021]** Treat * PostLawsuit -0.331 -0.338
[0.029]** [0.011]**
CONTROLS YES YES YES YES
GOV. CONTROLS NO YES NO YES
Industry/Year YES YES YES YES
N 61,870 61,870 61,870 61,870
R2 15% 15% 16% 16%
Panel B.
Dependent Variable
Dividend Payout Ratio (III)
Sample
(1) (2) (3) (4)
Log(Lawsuit) -1.322 -1.901
[0.001]*** [0.001]*** Treat * PostLawsuit -0.209 -0.278
[0.012]** [0.037]**
CONTROLS YES YES YES YES
GOV. CONTROLS NO YES NO YES
Industry/Year YES YES YES YES
N 61,870 61,870 61,870 61,870
R2 15% 15% 16% 16% Table 9 reports the multivariate regression results between employee lawsuits and different payout policy definitions. Std. errors
are clustered at firm level. Detailed definitions of variables are reported in the appendix. *, **, and *** indicate statistical
significance at the 10%, 5%, and 1% levels, respectively
Paper #840340
Table 10 reports the multivariate regression results between other employee disputes and payout policy controlling for firm-level variables. In
Panel A, from column (1) to column (6), our dependent variable is payout ratio. In Panel B, we measure the payout likelihood where our
dependent variable is firm paying dividend, one, or zero otherwise. Std. errors are clustered at firm level. Detailed definitions of variables are reported in the appendix. *, **, and *** indicate statistical significance at the 10%, 5%, and 1% levels, respectively
Table 10
Effects of Filing of Litigation Filing on Dividend Ratio : Other Employee Disputes
Panel A.
Dependent Variable
Payout Ratio
Sample
(1) (2) (3) (4) (5) (6)
Log(Wage Case) -0.045
[0.001]*** Log(Wage Amount) -0.344
[0.021]** Log(Inspection) -1.309
[0.001]*** Log(Discrimination Case) -0.557
[0.041]**
Log(Settlement Fees) -0.041
[0.023]** Log(Attorney Fees) -0.011
[0.001]***
CONTROLS YES YES YES YES YES YES
Industry/Year YES YES YES YES YES YES
N 61,870 61,870 61,870 61,870 61,870 61,870
R2 22% 22% 22% 21% 22% 21%
Panel B.
Dependent Variable
Dividend Probability
Sample
(1) (2) (3) (4) (5) (6)
Log(Wage Case) -0.115
[0.001]*** Log(Wage Amount) -0.309
[0.001]*** Log(Inspection) -0.510
[0.051]* Log(Discrimination Case) -0.990
[0.001]***
Log(Settlement Fees) -0.577
[0.001]*** Log(Attorney Fees) -0.210
[0.043]**
CONTROLS YES YES YES YES YES YES
Industry/Year YES YES YES YES YES YES
N 61,870 61,870 61,870 61,870 61,870 61,870
R2 17% 17% 17% 17% 18% 17%
Paper #840340
Table 11
Effects of Filing of Litigation on Dividend Ratio : Alternative Fixed Effects
Panel A.
Dependent Variable Payout Ratio
Sample
(1) (2) (3) (4)
Log(Lawsuit) -0.449 -0.301
[0.001]*** [0.001]*** Treat * PostLawsuit -0.209 -0.211
[0.001]*** [0.010]**
CONTROLS YES YES YES YES
GOV. CONTROLS NO YES NO YES
State/Year YES YES YES YES
N 61,870 61,870 61,870 61,870
R2 11% 12% 12% 12%
Panel B.
Dependent Variable Payout Ratio
Sample
(1) (2) (3) (4)
Log(Lawsuit) -0.778 -0.709
[0.022]** [0.025]** Treat * PostLawsuit -0.677 -0.690
[0.031]** [0.066]*
CONTROLS YES YES YES YES
GOV. CONTROLS NO YES NO YES
Firm/Year YES YES YES YES
N 61,870 61,870 61,870 61,870
R2 7% 8% 6% 7% Table 11 reports the multivariate regression results between employee and payout policy controlling for firm-level variables. In Panel A, from
column (1) to column (4), our dependent variable is payout ratio we run state fixed effects. In Panel B, our dependent variable is payout ratio and we run firm fixed effects.. Std. errors are clustered at firm level. Detailed definitions of variables are reported in the appendix. *, **, and *** indicate statistical significance at the 10%, 5%, and 1% levels, respectively
Paper #840340
Appendix I : Definition of Variables
Variables Definition Source
Panel A. Lawsuit Variables
Log(Lawsuit) Log transformation of total case NLRB
Duration Case duration : Case closure date minus case opening date NLRB
Charging Party Equal to one if case is filed by union, zero otherwise (case if filed by employee).
NLRB
Treat Treatment variable : Binary variable equal to one if firm is facing employee lawsuits, and zero otherwise.
NLRB
PostLawsuit
Binary variable and equal to one for all the years after lawsuit is filed, zero otherwise.
NLRB
Panel B. Other Disputes
Log(Wage Case) Log transformation of total number of wage related case Dept. of Labor
Log(Wage Amount) Log transformation of total number of wage related penalties Dept. of Labor
Log(Inspection) Log transformation of total number of OSHA inspection Dept. of Labor
Log(Discrimination Case) Log transformation of total number of discrimination cases S&P Capital IQ
Log(Settlement Fees) Log transformation of total number of settlement fees S&P Capital IQ
Log(Attorney Fees) Log transformation of total number of attorney fees S&P Capital IQ
Panel C. Dividend Variables
Payout Ratio Ratio of dividends to earnings S&P Capital IQ
Dividend Probability Equal to one if firm is paying dividend, and zero otherwise S&P Capital IQ
Total Payout Ratio Ratio of total payout to earnings S&P Capital IQ
Dividend Payout Ratio (II)
Dividends to total assets (multiplied by 100) S&P Capital IQ
Dividend Payout Ratio (III)
Dividends to market value of assets (multiplied by 100) S&P Capital IQ
Payout Through Repurchases The ratio between repurchase payout multiplied by 100 and total payout
S&P Capital IQ
ERROR Dividend forecast error following Grullon and Michaely (2002) S&P Capital IQ
Panel D. Control Variables
MtB Market price per share by bookvalue per share. S&P Capital IQ
Asset Growth Change in total assets between year t and t-1. S&P Capital IQ
ROA Income before extraordinary items plus depreciation and amortization divided by book value of assets
S&P Capital IQ
Firm Size Percetage of NYSE firms with the same or lower market capitalization.
S&P Capital IQ
Ret. Earnings to Tot. Cap. Ratio of retained earnings to total capital S&P Capital IQ
Idiosyncratic risk Standard deviation of monthly stock returns S&P Capital IQ
Cash Holding Ratio of cash and marketable securities to total assets S&P Capital IQ
Paper #840340
%Ind. Unionization Percentage of union membership at industry level www.unionstats.com
%State Union Percentage of union membership at firm's headquarter state. www.unionstats.com
%Union Growth Union membership growth at industry level www.unionstats.com
Personal intensity Number of employee normalized by total asset. S&P Capital IQ
Property, plants and equip.
Natural logarithm of net property, plant and equipment divided by the number of employees.
S&P Capital IQ
Leverage Debt in current liabilities plus long-term debt divided by assets S&P Capital IQ
Investment Capital expenditures normalized by assets S&P Capital IQ
Tax Ratio of income taxes to EBIT S&P Capital IQ
Inst. Ownership Total institutional ownership in fraction of shares outstanding S&PCapital IQ Database
and 10K filings
Takeover Index Firms' susceptibility to hostile takeover http://pages.uoregon.edu
/smckeon/
Small Firm
Small Firm is equal to one if the firm's total assets are lower than the median value of the sample in a specific year and zero otherwise.
S&P Capital IQ
Low Free CF Equal to one if a firm has above the sample median value of market-to-book ratio and below the sample median value of cash flow in a year, and zero otherwise
S&P Capital IQ
Paper #840340