Identifying and addressing the factors influencing the within-firm pay gaps has become a pressing issue amidst the widening global income inequality. This study investigates the impact of corporate ESG ratings on employee income and pay gaps using data from Chinese-listed companies between 2017 and 2021. The results suggest that ESG ratings significantly increase employee income. Further research indicates that ESG ratings exacerbate the within-firm pay gaps and income inequality due to the varying bargaining power among employees. This effect is particularly pronounced in non-state-owned and large-scale companies. This is also true for all kinds of companies in traditional and highly competitive industries. However, reducing agency costs and improving information transparency can help vulnerable employees with weaker bargaining power in income distribution to narrow their pay gaps. The research findings offer important insights to promote fair income distribution within companies and address global income inequality.

This study investigates how economic policy uncertainty (EPU) affects venture capital (VC) contract terms. Using a unique database of contracts between VCs and entrepreneurial firms in China, we provide evidence that VCs include more investor-friendly covenants in contracts when EPU increases. Our findings hold across a battery of robustness checks, including addressing endogeneity concerns and using alternative EPU measures. Our mechanism analysis shows that higher investment risk and increased VCs’ bargaining power might be plausible reasons why EPU positively affects the presence of investor-friendly covenants in VC contracts.

This study investigates how economic policy uncertainty (EPU) affects venture capital (VC) contract terms. Using a unique database of contracts between VCs and entrepreneurial firms in China, we provide evidence that VCs include more investor-friendly covenants in contracts when EPU increases. Our findings hold across a battery of robustness checks, including addressing endogeneity concerns and using alternative EPU measures. Our mechanism analysis shows that higher investment risk and increased VCs’ bargaining power might be plausible reasons why EPU positively affects the presence of investor-friendly covenants in VC contracts.

We investigate the causal impact of a company's environmental and social (ES) risk on the borrowing costs of its peer firms (that share lending banks). Using a regression discontinuity design based on the voting outcomes of ES-related shareholder proposals in US public companies' annual meetings from 2005 to 2021, we find that the passage of ES-related proposals leads to an average increase of 38 basis points in the loan costs for peer firms in the subsequent year. The negative spillover is more pronounced for peers with lower bargaining power in their banking relations or having lower ex-ante ES scores, on credit lines rather than term loans, and during the earlier years, validating that banks indeed channel the spillover. Notably, the spillover is particularly significant if the peer firms locate in the same states as the focal firm, or when the proposals reflect a higher degree of disagreement between the proposing shareholders and the managers, or for loans issued by banks lacking prior incentives or expertise in pricing ES risks (``non-ES banks''). We interpret these findings as evidence that the passage of ES-related shareholder proposals releases new information related to peers' ES risks and especially raises the awareness of ES risks among non-ES banks, prompting them to adjust loan rates for their portfolio companies accordingly.

Suppliers’ bargaining power mainly comes from their market position or top supplier status. However, it is also affected by the horizontal competition from top supplier size homogeneity based on the purchasing proportion of a buyer. Using a sample of listed companies in China, we find an inverted U-shaped relationship between the supplier size homogeneity with shared customers and trade credit provisions. As size homogeneity increases, suppliers may increase (decrease) trade credit provision to expand sales (for cash income). That is, based on the degree of supplier size homogeneity, the homogeneity may strengthen or weaken the supplier competition effect. We also find that if upstream and downstream firms have associated relationships, or if the business environment is poor, the competition effect from supplier size homogeneity is not obvious, whereas the weak financing ability of buyer promotes the supplier competition. In addition, the competition effect from supplier size homogeneity is not observed in state-owned firms.

High-bargaining-power (low-bargaining-power) customer (supplier) firms borrow (lend) more trade credit according to the literature. We study whether this bargaining power effect strengthens or weakens when the credit supply tightens. We construct a Nash bargaining model of trade credit and show that the bargaining power effect weakens if their financing costs increase more than that of the customers. We find support for our theory using a unique database of listed firms in China that discloses firms’ transaction information with important customers and suppliers. Interest-rate sensitive suppliers, proxied by a non-state ownership, a high debt rollover risk, and a high financial constraint index, reduce trade credit to their high-bargaining-power customers during credit contractions.

Using an extended overlapping generations (OLG) model, we theoretically prove that functional inequality resulting from weak labor bargaining power can be a key driver of high saving rates, as observed in China and other labor- abundant Asian emerging markets. Income distribution that favors capital over labor may attract excess capital investments and hence lead to high saving rates. The link between inequality and saving is especially prominent for the household sector because excess return on capital motivates the working-age population to increase their retirement savings. We also find empirical support for our theoretical predictions using China’s sectoral-level data.

Using data from 123 reverse mergers (RMs) in China, this study investigates the determinants and economic consequences of auditor choice in RMs. We find that the choice of a new auditor instead of the incumbent auditor is not related to auditor competence but to the relative bargaining power of RM firms and publicly listed firms (shell firms), and that the probability of choosing new auditors is higher when RM firms have more bargaining power relative to shell firms. We also find that hiring new auditors in the RM is associated with a higher valuation of injected assets and higher pre-listing income-increasing discretionary accruals in RM firms. Furthermore, post-merger firms exhibit drops in accounting performance and firm value and are more likely to restate their financial reports within 3 years of listing when new auditors are appointed in RMs. Finally, the cross-sectional test shows that this effect mainly exists in the context of RMs where the newly appointed auditor is a non-Big 10 auditor and a non-specialist auditor. Overall, our results emphasize the role of RM firms and shell firms in auditor choice for RMs and highlight the implications of such a joint decision on investor protection.

Declining worker bargaining power has been advanced as an explanation for dramatic generational changes in the U.S. macroeconomic environment such as the substantial decline in labor’s share of the national income, the loss of consumer purchasing power, and growing income and wealth inequality. In this paper, we investigate microeconomic implications by examining the effect of declining worker power on firm-level investment responses to a labor cost shock (mandated increases in the minimum wage). Over the past four decades, we find that investment-wage sensitivities go from negative to insignificant as management becomes less constrained and can pursue outside options. Consistent with drivers of weakening worker power, investment-wage sensitivity changes are more significant for firms that are more exposed to globalization, technological change, and declining unionization.

Hukou, China’s household registration system, affects access to public services and signals the strength of a person’s local social network, guanxi. We use a collective model and data on household consumption and spouses’ hukou status to show that hukou plays a crucial role in determining within-family bargaining power. Wives who bring the family more lucrative hukou enjoy significantly higher bargaining power than other wives. Still, these wives have less bargaining power than their husbands. Large differences in preferences between husbands and wives, especially regarding alcohol, tobacco, and clothing, allow us to identify these disparities.