Labor Unemployment Risk and Corporate Financing Decisions
58 Pages Posted: 29 Aug 2010 Last revised: 18 Feb 2013
Date Written: February 13, 2013
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.
Keywords: capital structure, financial distress, unemployment risk, compensating wage differentials
JEL Classification: G32, G33, J31, J65
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