Capital Structure and a Firm's Workforce

Annual Review of Financial Economics, Forthcoming

50 Pages Posted: 18 Sep 2017 Last revised: 5 Oct 2018

Date Written: September 2018


While businesses require funding to start and grow, they also rely on human capital, which affects how they raise funds. Labor market frictions make financing labor different than financing capital. Unlike capital, labor cannot be owned and can act strategically. Workers face unemployment costs, can negotiate for higher wages, are protected by employment regulations, and face retirement risk. I propose using these frictions as a framework for understanding the unique impact of a firm’s workforce on its capital structure. For instance, high leverage often makes managing labor more difficult by undermining employees’ job security and increasing the need for costly workforce reductions. But firms can also use leverage to their advantage, such as in labor negotiations and defined benefit pensions. This research can help firms account for the needs and management of their workforce when making financing decisions.

Keywords: leverage, corporate debt, unemployment, labor bargaining, employment protection, pensions

JEL Classification: G32, J31, J32, J33, J38, J51, J52, J63, J65, J68, M51, M52

Suggested Citation

Matsa, David A., Capital Structure and a Firm's Workforce (September 2018). Annual Review of Financial Economics, Forthcoming, Available at SSRN:

David A. Matsa (Contact Author)

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States
847-491-8337 (Phone)
847-491-5719 (Fax)

National Bureau of Economic Research (NBER) ( email )

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Cambridge, MA 02138
United States

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