Capital Structure and a Firm's Workforce

David A. Matsa ()
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David A. Matsa: Kellogg School of Management, Northwestern University, Evanston, Illinois 60208, USA

Annual Review of Financial Economics, 2018, vol. 10, issue 1, 387-412

Abstract: While businesses require funding to start and grow, they also rely on human capital, which affects how they raise funds. Labor market frictions make financing labor different than financing capital. Unlike capital, labor cannot be owned and can act strategically. Workers face unemployment costs, can negotiate for higher wages, are protected by employment regulations, and face retirement risk. I propose using these frictions as a framework for understanding the unique impact of a firm's workforce on its capital structure. For instance, high leverage often makes managing labor more difficult by undermining employees’ job security and increasing the need for costly workforce reductions. But firms can also use leverage to their advantage, such as in labor negotiations and defined benefit pensions. This research can help firms account for the needs and management of their workforce when making financing decisions.

Keywords: leverage; corporate debt; unemployment; labor bargaining; employment protection; pensions (search for similar items in EconPapers)
JEL-codes: G32 J31 J32 J33 J38 J51 J52 J63 J65 J68 M51 M52 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (11)

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