HONG KONG,CHINA - Media OutReach - 9 September 2019 - Research shows work forces trying to limit dividends aremost successful in nations with broader collective bargaining and effectivelabour law enforcement.

Existing research shows thatcorporate payout policies are greatly influenced by the legal protection ofshareholders and creditors. Yet in the past, less attention has been paid tolabour -- another important claimant to companies' resources.

Workers, who prefer that companieshold on to profits rather than make cash payouts, have great potential to limitrent distribution among shareholders.

"The primary objective oflabour is to maximize the present value of their expected future wages andbenefits through excess rent extraction," says Prof. Donghui Wu,Professor of School of Accountancy and Director of Centre for Institutions andGovernance at The Chinese University of Hong Kong (CUHK) Business School. Prof.Wu has recently been named by Abacus as the secondmost prolific author during 1999-2018 period, based on papers on the Chinesecapital market published in Tier 1 journals.

His study "Having a Finger in the Pie: Labour Power and CorporatePayout Policy" examines the effect of labourpower on business payout policy. With his fellow authors at the Texas ChristianUniversity, the Hong Kong Baptist University, and the University of Macau, thestudy utilises data on labour laws with 41,436 firms in 39 countries from 1989to 2015.

"We show shifts in labour lawsgoverning collective labor relations have a significant impact on corporatepayout decisions," Prof. Wu says. "Basically, legislative changesthat strengthen labour power reduce firms' dividend payments and total payouts."

Prof. Wu says the payout restrictioneffect of labor power is more pronounced in companies with greater laborintensity and in businesses operating in countries with broader collectivebargaining coverage and more effective law enforcement.

"These results are consistentwith the idea that the workforces of businesses seek to maximize their incomethrough collective bargaining. Our findings show that labour power is anotherimportant country‐wide institution that shapes corporate payout policy,"he says.

The study's data included anexamination of the 2007-08 financial crisis -- regarded as the worst crisissince the Great Depression of the 1930s -- which hit financial markets worldwideand led the global economy into a prolonged downturn.

"The crisis, like a shock,abruptly lowers the available return on investment opportunities of firms inaffected countries," says Prof. Wu.

"To the extent that economicrents decrease sharply during a financial crisis, the constraint on companypayouts imposed by labour power may become particularly severe.

"We used the crisis to generateadditional evidence. Confirming that economic rents declined during the crisisperiod, the evidence enhances our confidence that our results were notspurious," he says.

Strong labour power enables unions to take a toughstand in collective bargaining by making more rigid wage and benefit demandsand imposing greater firing costs that, in turn, increase firms' labouradjustment fees and decrease operating flexibility.

The strength of union bargaining power increaseswith the proportion of staff covered by collective bargaining.

When firms facing strong labor unions are subjectto lower operating flexibility, managers may cut dividends and conserve cash toregain some operating flexibility.

The study contrasted before-and-after differencesin payouts of firms that saw a change in labour laws in a given year with thebefore-and-after differences in payouts of businesses that did not experiencesuch a change in the same year and industry.

Labour regulation changes are often triggered bychanges in a nation's government. Changes in political leadership often lead tolegislation, including labour laws, being revamped.

For example, in France, the newly elected PresidentEmmanuel Macron's government launched an overhaul of French labor laws inSeptember of 2017 -- the first of a number of reforms he promised would helprevive the economy.

Reforms to labour laws also can be linked tobusiness cycles in a country; stricter labor protection legislation is oftenpassed or retained in periods of economic contractions, while governments mayease labour rules that deal with unemployment during a period of low economicgrowth.

A nation's labour laws are also shaped by the typeof political party in power: labor regulations are more protective of workerswhen leftist governments are in power, while the political leaning of agovernment may also influence a company's policy and regulation decisions.

Prof. Wu says the study found that, as enforcementof labour laws rests with governments, labor bargaining power increases withthe extent of law compliance. It means the effect of labour power on profitdistribution is more salient in countries with more effective law enforcement.

The findings of the study, compiled after the datawas used in a series of complicated statistical calculations, took into accountmany variables including a company's cash holdings, profitability, financialleverage, and a nation's gross domestic product growth and economic and equitymarket development.

"Our findings suggest that strong labour poweralone does not cause a reduction in total payouts," says Prof. Wu. "Rather,it is the bargaining power in conjunction with rigid employment laws that leadsto reductions in the total payouts.

"We found that the effect of labour power oncorporate payouts is not a purely mechanical profitability effect. Tightenedoperating flexibility and excess rent sharing are two channels through whichlabour power affects payouts," he says.

"We also found that firms operating in moredeveloped financial markets make greater payouts, and that businesses cutdividends and total payouts after a change in labour laws that grant more powerto labour, compared with a set of control firms in the same industry at thesame time, but based in nations without labour law changes," he adds.

Prof. Wu says the study adds to a growing body ofinternational studies examining the economic impact of country-wide laws or lawchanges.

"We have complemented this literature bydemonstrating that shifts in labor laws governing collective labour relationshave a significant impact on a firm's payout decisions," says Prof. Wu.

Reference:

In‐Mu Haw,In‐MuHaw, Bingbing Hu, Donghui Wu and Xu Zhang, Having a Finger in the Pie: LaborPower and Corporate Payout Policy, FinancialManagement, 47, 4, (993-1027), (2018).

About CUHK Business School

CUHKBusiness School comprises two schools -- Accountancy and Hotel andTourism Management -- and four departments -- Decision Sciences andManagerial Economics, Finance, Management and Marketing. Establishedin Hong Kong in 1963, it is the first business school to offer BBA, MBA andExecutive MBA programmes in the region. Today, the Schooloffers 8 undergraduate programmes and 20graduate programmes including MBA, EMBA, Master,MSc, MPhil and Ph.D.

Inthe Financial Times Global MBA Ranking 2019,CUHK MBA is ranked 57^th. In FT's 2018 EMBA ranking, CUHK EMBA is ranked 29^thin the world. CUHK Business School has the largest number of business alumni (36,000+)among universities/business schools in Hong Kong -- many of whom are keybusiness leaders. The School currently has about 4,400undergraduate and postgraduate students and Professor Kalok Chan is the Dean ofCUHK Business School.

More information is available at www.bschool.cuhk.edu.hk or by connecting with CUHK Business Schoolon Facebook: www.facebook.com/cuhkbschool and LinkedIn: www.linkedin.com/school/3923680/.