Debt, Hedging, and Human Capital

35 Pages Posted: 23 Feb 2015

See all articles by Stephen D. Smith

Stephen D. Smith

(Deceased)

Larry D. Wall

Federal Reserve Bank of Atlanta - Research Department

Date Written: December 2005

Abstract

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

Smith, Stephen Dewitt and Wall, Larry D., Debt, Hedging, and Human Capital (December 2005). FRB Atlanta Working Paper No. 2005-30. Available at SSRN: https://ssrn.com/abstract=2482414 or http://dx.doi.org/10.2139/ssrn.2482414

Larry D. Wall (Contact Author)

Federal Reserve Bank of Atlanta - Research Department ( email )

1000 Peachtree Street, NE
Atlanta, GA 30309-4470
United States
404-498-8937 (Phone)
404-498-8956 (Fax)

HOME PAGE: http://www.frbatlanta.org/econ_rd/bios/wall.htm

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