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E-MailErik Gilje is Assistant Professor of Finance at The Wharton School of the University of Pennsylvania, and Michael Wittry is Assistant Professor of Finance at the Fisher College of Business at The Ohio State University. This post is based on their recent paper.
Privately held and publicly traded firms are responsible for roughly equal portions of U.S. economic output, but are subject to extremely large differences in agency and financial frictions, which can lead to significant variation in corporate policies and real outcomes. Using detailed asset-level data from the U.S. coal industry, our paper examines how listing related frictions affect potential tradeoffs that firms face between workplace safety and firm productivity.
Theory offers competing predictions on how listing status might relate to workplace safety. On the one hand, the cost of adverse workplace incidents could be higher for public companies, which have greater disclosure requirements and reputational risk, and are subject to greater stockholder and political pressure than private firms. Public firms also have greater access to external capital markets, potentially alleviating cuts to safety investments when internally constrained. These factors each point towards public firms having safer workplaces than their private counterparts.
On the other hand, private firms have less diversified ownership, which may alleviate agency costs arising from information asymmetry. Ownership concentration may also limit risk-sharing opportunities, and thus, risk-taking. Further private firm owners may have strong social ties to the local community and derive personal utility from a safe workplace and good relationships with employees. These factors would suggest that public firms engage in activities that result in a higher workplace injury and accident propensity.
We find that workplace safety deteriorates dramatically upon a change in listing status. Specifically, mines that are purchased by public firms or are part of an IPO experience a large increase in safety violations. However, this increase is concentrated in what appears to be tail risk, or violations for potential accidents stemming from low-probability events. Such violations increase by nearly 57%. Furthermore, upon a listing status change, workplace fatalities increase four-fold relative to the unconditional sample mean.
These results suggest public firms are associated with workplaces that are less safe and engaged in higher risk-taking. Importantly, these results allow us to characterize not only the direction, but also the type of safety risk that public firms undertake. In particular, we find no evidence that public firms are reckless or participate in the highest probability activities. Rather, public firms tend to increase risk by augmenting their distribution to include significantly more low-probability events, which at times results in fatal accidents.
We also find that mine productivity is tightly linked with listing status. Specifically, coal production per hour spent on mining activities increases by 13.2%. Assuming fixed wages and hours across a listing status change, this translates into a $3.19 million annual profit increase for the average mine in our sample. We further assess the tradeoff by splitting our sample by the relative size of productivity increases over the life of the asset. We find that increases in safety violations upon a listing status change are concentrated in the group of mines that have experienced the largest productivity increases. This evidence suggests that public firms increase labor productivity at the expense of workplace safety within individual mines, and more specifically, that firms are increasing safety risks in parts of the distribution that are expected to be lower probability, and therefore likely to be realized less frequently.
To determine the economic mechanisms that may be driving the change in behavior among publicly listed firms, we examine two non-mutually exclusive channels. Specifically, we construct empirical tests to assess support for whether information asymmetry between public shareholders and public firm managers could be associated with our results. We also examine empirical evidence on how private firm ownership and ties with the local community may be related to our results.
First, we exploit plausibly exogenous declines in coal prices that are likely to differentially alter the importance of information asymmetry for public firms relative to private firms. At public firms, the separation of ownership and control likely makes it difficult for owners to know what portion of poor performance can be attributed to price changes, and what portion is due to poor managerial skill or decision-making. Thus, during periods of coal price declines, managers of public firms may feel intense pressure to increase productivity, and thus take on risks that they think are unlikely to materialize in order to do so. In re-estimating our tests on workplace safety and productivity, we find that the entirety of the effects are concentrated during years in which coal prices are declining, precisely when the separation of ownership and control is likely to exert its greatest pressure on managerial decision-making.
Second, we construct two sets of tests to assess how private firm preferences and community ties may relate to our results. First, private firm managers and owners may feel a stronger responsibility to the local community surrounding the mine if they reside nearby. Public firms, on the other hand, have diffuse ownership and thus may have less consumption value related to stewardship of jobs locally. Consistent with this hypothesis, we find that public listing status is only related to workplace safety and productivity for mines that are located near the firm’s headquarters.
Finally, we exploit a small number of Mine Safety and Health Administration inspection office closures, moves, and district realignments that change the proximity of the regulator to assigned mines, and thus alter the intensity of oversight and probability of violation detection. We find that mines do re-optimize the mix between workplace safety and productivity following inspection office changes, but only among those held by publicly listed firms. In particular, publicly owned mines significantly increase safety violations, as well as productivity, following large decreases in the proximity to the regulator, which is consistent with the argument that regulatory oversight is potentially less important for closely held firms that may have stronger ties to their employee’s well-being.
Overall, our results highlight the importance of listing-related economic frictions for firm productivity and workplace safety tradeoffs and have significant implications for employee well-being.
The full paper is available here.
