Labor Unemployment Risk and Corporate Financing Decisions
Ashwini K. Agrawal
New York University (NYU) - Department of Finance
David A. Matsa
Northwestern University - Kellogg School of Management; National Bureau of Economic Research (NBER)
February 13, 2013
Journal of Financial Economics (JFE), Forthcoming
NYU Working Paper No. FIN-10-010
This paper presents evidence that firms choose conservative financial policies partly to mitigate workers’ exposure to unemployment risk. We exploit changes in state unemployment insurance laws as a source of variation in the costs borne by workers during layoff spells. We find that higher unemployment benefits lead to increased corporate leverage, particularly for labor-intensive and financially constrained firms. We estimate the ex ante, indirect costs of financial distress due to unemployment risk to be about 60 basis points of firm value for a typical BBB-rated firm. The findings suggest that labor market frictions have a significant impact on corporate financing decisions.
Number of Pages in PDF File: 58
Keywords: capital structure, financial distress, unemployment risk, compensating wage differentials
JEL Classification: G32, G33, J31, J65
Date posted: August 29, 2010 ; Last revised: February 18, 2013
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