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