Does it pay to treat employees well?: The case of informal finance

Abstract

We examine the role of employee treatment in firms’ access to informal finance in the form of trade credit. We find that better employee treatment improves the amount of informal finance a firm can obtain. This effect is stronger in environments with (1) more intensive product market competition, (2) highly customized inputs, (3) lower social capital and (4) high demand for skilled labor. Furthermore, the role of employee treatment varies according to a firm's financial health and liquidity. Employee treatment becomes less important for firms having a low level of liquidity but is more pronounced for firms experiencing financial distress.