Labor-Capital Substitution and Capital Structure: Evidence from Automation
62 Pages Posted: 24 Apr 2020 Last revised: 7 Sep 2021
Date Written: May 29, 2020
This paper presents evidence that exposure to automation technologies has a positive impact on a firm’s financial leverage. The results are robust when we measure a firm’s automation exposure based on either patent textual analysis or the robotics adoption. The effects are more pronounced in firms with greater labor costs, routine task intensity, firing costs, share of minimum wage workers, and union coverage. Our analysis suggests that the exposure to automation technologies creates a replacement threat that weakens workers’ bargaining power, compressing their wage premiums for bearing financial distress risk and reducing wage rigidity, both of which allow firms to increase financial leverage.
Keywords: automation, capital structure, labor economics, financial leverage, wage rigidity
JEL Classification: G32, G33, J30, O31, O33
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