Financialization, corporate governance and employee pay: a firm level analysis

This study explores the link between financialization and employee wages. Using a panel of European banks from Bankscope we test whether banks use leverage strategically in order to refrain wage increases, focusing on the strategic use of banks’ capital structure as a disciplinary mechanism. The results indicate the existence of a negative and significant effect of leverage on average employee wages. In addition, considering that the effects of leverage could depend on individual bank risk, we extend our analysis to distressed banks, using the z-score as a measure to distinguish banks that are more prone to bankruptcy. We also observe that leverage is statistically significant when relating to average wages; however the impact does not differ in magnitude in comparison to non-distressed banks.The first author gratefully acknowledges the support provided by the Portuguese Foundation for Science and Technology (Fundação para a Ciência e a Tecnologia) under the grant SFRH/BD/80308/2011.UID/ECO/03182/201