Outside Employment Opportunities, Employee Productivity, and Debt Discipline
51 Pages Posted: 20 Mar 2008 Last revised: 11 Mar 2015
Date Written: March 10, 2015
We analyze how changes in labor market conditions influence the relation between a firm’s debt level and employee productivity. We document that better (worse) outside employment opportunities create a more negative (positive) relation between employee productivity and debt at both the firm and industry levels. Moreover, NAFTA, a quasi-natural experiment that affected employment opportunities in certain industries, resulted in a more positive productivity-leverage relation for firms in these industries. Our findings suggesting that outside employment opportunities affect the disciplining role of debt illustrate how labor market conditions impact the efficacy of corporate financial policies.
Keywords: Debt Discipline, Agency Theory, Outside Employment Opportunities, Employee Productivity
JEL Classification: G30, G32, G38
Suggested Citation: Suggested Citation