Human-Capital-Intensive Firms: Incentives and Capital Structure
43 Pages Posted: 31 Jul 2003
Date Written: June 2003
I study the incentives of nonmanagement key personnel in human-capital-intensive firms. I show that their compensation structure and hence their incentives depend on the firm's capital structure and top management compensation. The feasible set of renegotiation-proof contracts decreases as debt rises. Debt leads to inferior risk-sharing even if investments are efficient in equilibrium. Therefore, the optimal debt level decreases with the human-capital intensity of the firm. I find strong empirical evidence that there is a negative relation between leverage and human-capital intensity. Moreover, the more specific the firm's assets, the stronger becomes this negative relation.
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