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Payroll and Financial Leverage

38 Pages Posted: 5 Nov 2016 Last revised: 30 Dec 2016

Li He

Vienna Graduate School of Finance, Students

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

He, Li, Payroll and Financial Leverage (December 1, 2016). Available at SSRN: or

Li He (Contact Author)

Vienna Graduate School of Finance, Students ( email )

43-1-31336 5158 (Phone)

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