Board-Level Employee Representation and Risk Sharing Between Shareholders and Employees: Evidence from the German Codetermination Act of 1976

With increasing concerns about the accountability of shareholder-oriented boards, board-level employee representation (BLER) is gaining momentum in public debate. Although BLER is not a new idea, there is little consensus about its economic effects. Using the enactment of the German Codetermination Act of 1976 as a quasi-natural experiment, we document two consequences of BLER. First, labor expenses of firms become less responsive to revenue, specifically in sectors with high labor turnover rates. Second, BLER increases operating leverage of firms. Overall, our findings are consistent with the view that BLER affects risk sharing between shareholders and employees.