Essays on the Interplay between Finance and Labour

  • Mohamed Ghaly

Student thesis: Phd


This thesis is an effort to advance our knowledge and understanding of the role thatlabor plays in shaping corporate financial policies and how it is in turn affected byconsiderations related to firms' financing. I present three essays on the interactionbetween finance and labor. First, I provide two examples of how labor affectsfinancial decisions, in which I investigate the impacts that commitment to employeewelfare and reliance on skilled labor have on cash management policies. Next, Iexamine the effect of ownership structure on labor investment decisions as anexample of how finance affects human capital.In the first essay, I examine the relation between employee welfare practices andcorporate cash holdings. Consistent with the predictions of the stakeholder theory, Ifind firms that are strongly committed to employee welfare, measured by ratings onemployee relations, to hold more cash. The effect of employee welfare standards oncash holdings is stronger for firms in human-capital-intensive, competitive, and lowturnoverindustries in which employees are more important to their businesses. Thefindings highlight the importance of human capital and employee-friendly practicesas an overlooked determinant of cash holdings and suggest that managers can usecash to signal their financial health to current and potential employees, therebyincreasing their competitiveness in labor markets.The second essay examines whether a firm's dependence on skilled labor affects itscash holdings. Consistent with a precautionary motive to accumulate cash whenhigher labor adjustment costs slow a firm's labor demand reaction to cash flowshocks, I find robust evidence that companies with higher shares of skilled laborhold more cash. The effect of skilled labor on cash holdings is more pronounced forfirms that are financially constrained, attach higher values to their human capital,operate in competitive product markets, and belong to industries characterized byhigh labor mobility. The findings suggest that labor heterogeneity, and in particularthe skill level of workers is an important determinant of corporate cash policies. Theresults provide managers of firms, particularly those that are financially constrained,with insights on how to minimize their labor adjustment costs and reduce the risk oflosing their valuable human capital.In my third essay, I examine whether the presence of long-term institutionalinvestors, who typically have strong monitoring incentives, can help mitigate agencyconflicts associated with firms' employment choices. I find that abnormal net hiring,measured as the absolute deviation from net hiring predicted by economicfundamentals, decreases in the presence of institutional investors with longerinvestment horizons. Firms dominated by long-term shareholders reduce both overinvestment(over-hiring and under-firing) and under-investment in labor (underhiring).The monitoring role of long-term investors is more pronounced for firmsfacing higher labor adjustment costs. These findings suggest that institutionalinvestors play an important role in firm-level employment decisions.
Date of Award31 Dec 2015
Original languageEnglish
Awarding Institution
  • The University of Manchester
SupervisorKonstantinos Stathopoulos (Supervisor) & Viet Dang (Supervisor)


  • Institutional Investors
  • Monitoring
  • Investment Horizon
  • Labor Adjustment Costs
  • Human Capital
  • Labor Skill
  • Implicit Claims
  • Employee Welfare
  • Cash Holdings

Cite this