Do Labor Conditions Matter in Loan Contracting? Evidence from Labor Specificity
49 Pages Posted: 25 Mar 2019
Date Written: March 1, 2019
The labor specificity of a firm refers to the extent to which the firm’s workers have general or specific skills. In this paper, we examine how loan contracts terms are affected by borrowers’ labor specificity. We find that the loan contracts of borrowers with greater labor specificity are associated with tighter loan conditions in terms of higher loan spreads, smaller loan size, and a larger number of loan covenants. These findings suggest that lenders, with asymmetric payoff functions, are concerned about cost stickiness arising from labor specificity. In further analyses, we find that the positive relation between labor specificity and tightness in loan terms is stronger for firms that rely more on labor, have less redeployable capital assets, and when banks face less competition. In further analysis of the cost stickiness channel, we also document that labor specificity contributes to a firm’s cost stickiness. Overall, our paper provides new insight into how the nature of the borrower’s labor force impacts loan contracting.
Keywords: Labor Specificity; Loan Spread; Loan Size; Loan Covenants
JEL Classification: G21, G32, J6
Suggested Citation: Suggested Citation