Do Labor Conditions Matter in Loan Contracting? Evidence from Labor Specificity

49 Pages Posted: 25 Mar 2019

See all articles by Yangyang Chen

Yangyang Chen

Hong Kong Polytechnic University - Faculty of Business

Jeffrey Ng

Hong Kong Polytechnic University - School of Accounting and Finance

Chong Wang

The Hong Kong Polytechnic University

Date Written: March 1, 2019

Abstract

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

Chen, Yangyang and Ng, Jeffrey and Wang, Chong, Do Labor Conditions Matter in Loan Contracting? Evidence from Labor Specificity (March 1, 2019). Available at SSRN: https://ssrn.com/abstract=3344873 or http://dx.doi.org/10.2139/ssrn.3344873

Yangyang Chen

Hong Kong Polytechnic University - Faculty of Business ( email )

9/F, Li Ka Shing Tower
The Hong Kong Polytechnic University
Hong Kong, Hung Hom, Kowloon M923
China

Jeffrey Ng (Contact Author)

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

Hung Hom
Kowloon
Hong Kong

Chong Wang

The Hong Kong Polytechnic University ( email )

The Hong Kong Polytechnic University
The Hong Kong Polytechnic University
Hong Kong, 00000
Hong Kong

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