Does Employee Compensation Influence Financial Leverage? Insight from the Indian Hi-Tech Sector

Abstract

This study investigates the impact of firm compensation practices on financial leverage in a large emerging market. Employing trade-off theory, this study highlights the importance of deferred compensation in capital structure in the Indian Context which is associated with the large Hi-Tech sector. To investigate this, we have used hand-collected data from the financial statements of the top 100 listed firms on the National Stock Exchange of India for the period from 2010 to 2022. We have used the difference Generalized method of moment (GMM) regression estimation approach for data analysis. Our findings suggested that deferred compensation is negatively related to firms' financial leverage in high-tech firms. Thus, firms can use deferred compensation as a mode of financing for various investment activities instead of external borrowing on stringent conditions for such investment. Our assumptions, grounded in tradeoff theory and agency theory, posit a negative relationship between deferred compensation and firm financial leverage. This suggests that deferred compensation can be effectively utilized in the high-tech sector as an alternative to external borrowing.