Payroll and Financial Leverage
38 Pages Posted: 5 Nov 2016 Last revised: 30 Dec 2016
Date Written: December 1, 2016
I examine how payroll rigidity affects corporate financing decisions by estimating a dynamic model in which investment, employment, and financing decisions are determined endogenously as a result of exogenous labor market frictions. I find that, after negative productivity shocks, firms' inability to reduce payroll leads them to reduce leverage; after positive productivity shocks, firms hire fewer workers in anticipation of payroll rigidity, allowing them to take on more leverage. A structural estimation ascertains the model's ability to fit the data. Model predictions are confirmed by a difference-in-differences analysis that exploits the Senior Citizens' Freedom to Work Act of 2000 as an exogenous shock to payroll rigidity.
Keywords: Payroll, Financial Leverage, Wage Rigidity
JEL Classification: G32, J30
Suggested Citation: Suggested Citation