Debt, Hedging, and Human Capital
35 Pages Posted: 23 Feb 2015
Date Written: December 2005
This paper provides a theory of debt and hedging based on human capital. We distinguish human capital from physical capital in two ways: (1) human capital is inalienable and can exercise a one-sided option to leave the firm, and (2) human capital is not perfectly replaceable. We show that a firm may reach the first best solution while issuing debt or equity to outsiders provided that either the insiders receive a senior claim or that the firm hedges. We then show that, given asymmetric information concerning costs, the only viable solution has the firm issuing debt to outsiders and hedging.
Keywords: hedging, human capital, capital structure
JEL Classification: G32
Suggested Citation: Suggested Citation