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 relation 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 in financial distress. For identification, we exploit the quasi-natural experiment of California Paid Family Leave Legislation. Further, we find that higher-leverage firms recruit new employees with greater labor income diversification.

Keywords: clientele effect, family labor income diversification, employee job risk aversion, leverage, capital structure

JEL Classification: G30, G32, G39