Does Employee Welfare Influence Cost of Equity: International Evidence

The objective of the proposed study is to examine the association between employee welfare and the cost of equity capital. The proposed project will examine the stated association based on two competing theories: stakeholder theory and agency theory. According to the stakeholder theory, it is argued that firms investment in employee welfare standards are more likely to have positive benefits for the company. These practices will bring reputation to the firm in the eyes of the stakeholders including shareholders that will reduce the perceive risks of the company and consequently reduce the firms implied cost of equity capital. On contrary, according to the agency theory, firms investment in employee welfare activities are considered as an opportunistic behaviour of firms management because firms may hide the corporate misconducts through practicing these activities. In addition, these activities provide signals managers expropriation behaviour at the expense of shareholders. As such, it is argued that these practices will increase the firms implied cost of equity capital as investors consider these firms are riskier. However, the link between employee welfare and the cost of equity capital is still unexplored. This motivates us to examine the proposed research. For executing this project, 16 years of data from 63 countries will be used from 2002 to 2017. The proposed project will contribute to the existing literature through examining an unexplored link between employee welfare and the cost of equity capital. Given that International Integrated Reporting Council (IIRC) classifies human capital as one of the six capital of the firm and emphasise to report this capital separately in the firms annual report, our study will inform the Integrated Reporting Standard setters and other stakeholders the perceived benefits of human capital for the organizations.