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Labor Unemployment Risk and Corporate Financing Decisions

58 Pages Posted: 29 Aug 2010 Last revised: 18 Feb 2013

Ashwini K. Agrawal

London School of Economics & Political Science (LSE)

David A. Matsa

Northwestern University - Kellogg School of Management; National Bureau of Economic Research (NBER)

Date Written: February 13, 2013

Abstract

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

Suggested Citation

Agrawal, Ashwini K. and Matsa, David A., Labor Unemployment Risk and Corporate Financing Decisions (February 13, 2013). Journal of Financial Economics (JFE), Forthcoming; NYU Working Paper No. FIN-10-010. Available at SSRN: https://ssrn.com/abstract=1667035 or http://dx.doi.org/10.2139/ssrn.1667035

Ashwini Agrawal

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

David Matsa (Contact Author)

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States
847-491-8337 (Phone)
847-491-5719 (Fax)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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