Employee Relations and Credit Risk

Consistent with the theory that human capital management influences organizational performance and risk, we find that employee relations explain the cross-sectional variation in credit risk. We construct an aggregate measure for the quality of employee relations based on the firm's engagement in employment practices and policies, and document that firms with stronger employee relations enjoy a statistically and economically lower cost of debt financing, higher credit ratings, and lower firm-specific risk. These findings are robust to the inclusion of a comprehensive set of controls and to alternative explanations.