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

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