Human Capital, Capital Structure, and Employee Pay: An Empirical Analysis

56 Pages Posted: 17 Mar 2008 Last revised: 28 Feb 2013

See all articles by Thomas J. Chemmanur

Thomas J. Chemmanur

Boston College - Carroll School of Management

Yingmei Cheng

Florida State University - College of Business

Tianming Zhang

Florida State University - Department of Accounting

Date Written: December 16, 2012

Abstract

We test the predictions of Titman (1984) and Berk, Stanton, and Zechner (2010) by examining the effect of leverage on labor costs. Leverage has a significantly positive impact on CEOs’ cash, equity-based, and total compensation. Compensation of new CEOs hired from outside the firm is positively related to prior-year firm leverage. In addition, leverage has a positive and significant impact on average employee pay. The incremental total labor expenses associated with an increase in leverage are large enough to offset the incremental tax benefits of debt. The empirical evidence supports the theoretical prediction that labor costs limit use of debt.

Keywords: Capital structure, Human capital, Labor costs

JEL Classification: G32, J31

Suggested Citation

Chemmanur, Thomas J. and Cheng, Yingmei and Zhang, Tianming (Tim), Human Capital, Capital Structure, and Employee Pay: An Empirical Analysis (December 16, 2012). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=1099000 or http://dx.doi.org/10.2139/ssrn.1099000

Thomas J. Chemmanur

Boston College - Carroll School of Management ( email )

Finance Department, 436 Fulton Hall
Carroll School of Management, Boston College
Chestnut Hill, MA 02467-3808
United States
617-552-3980 (Phone)
617-552-0431 (Fax)

HOME PAGE: http://https://www2.bc.edu/thomas-chemmanur/

Yingmei Cheng (Contact Author)

Florida State University - College of Business ( email )

423 Rovetta Business Building
Tallahassee, FL 32306-1110
United States
850-644-7869 (Phone)

Tianming (Tim) Zhang

Florida State University - Department of Accounting ( email )

Rovetta Business Bldg. (RBA)
College of Business
Tallahassee, FL 32306-1110
United States

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