Labor-Capital Substitution and Capital Structure: Evidence from Automation

62 Pages Posted: 24 Apr 2020 Last revised: 7 Sep 2021

See all articles by Jiaping Qiu

Jiaping Qiu

McMaster University - Michael G. DeGroote School of Business

Chi Wan

University of Massachusetts Boston - Department of Accounting and Finance

Yan Wang

McMaster University

Date Written: May 29, 2020

Abstract

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

Suggested Citation

Qiu, Jiaping and Wan, Chi and Wang, Yan, Labor-Capital Substitution and Capital Structure: Evidence from Automation (May 29, 2020). Available at SSRN: https://ssrn.com/abstract=3571489 or http://dx.doi.org/10.2139/ssrn.3571489

Jiaping Qiu

McMaster University - Michael G. DeGroote School of Business ( email )

1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada

Chi Wan

University of Massachusetts Boston - Department of Accounting and Finance ( email )

Boston, MA 02125
United States

Yan Wang (Contact Author)

McMaster University ( email )

1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada

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