The Employee Clientele of Corporate Leverage: Evidence from Family Labor Income Diversification

Abstract

Using proprietary employer-employee matched data of the U.S. Census Bureau, we measure individual workers’ risk tolerance towards their jobs by their family labor income diversification, and formally test the firm-level equilibrium matching between capital structure and employees’ job risk attitudes (the “clientele effect”). Consistent with theories, we find a robust, positive association between a firm’s debt usage and its employees’ family labor income diversification. This relation is stronger for firms with higher labor intensity and those with greater distress risk. Further, higher-leverage firms recruit new employees with greater labor income diversification. For identification, we exploit the California Paid Family Leave Legislation as a shock to family income diversification, and the SFAS 123(r) rule change as a shock to firm leverage.

Keywords: clientele effect, family labor income diversification, employee job risk aversion, leverage, capital structure, California Paid Family Leave Legislation, SFAS 123(r) rule change

JEL Classification: G30, G32, G39