Labor unemployment risk and corporate financing decisions

Ashwini Agrawal and David A. Matsa

Journal of Financial Economics, 2013, vol. 108, issue 2, 449-470

Abstract: This paper presents evidence that firms choose conservative financial policies partly to mitigate workers' exposure to unemployment risk. We exploit changes in state unemployment insurance laws as a source of variation in the costs borne by workers during layoff spells. We find that higher unemployment benefits lead to increased corporate leverage, particularly for labor-intensive and financially constrained firms. We estimate the ex ante, indirect costs of financial distress due to unemployment risk to be about 60 basis points of firm value for a typical BBB-rated firm. The findings suggest that labor market frictions have a significant impact on corporate financing decisions.

Keywords: Capital structure; Financial distress; Unemployment risk; Compensating wage differentials (search for similar items in EconPapers)
JEL-codes: G32 G33 J31 J65 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (190)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:108:y:2013:i:2:p:449-470

DOI: 10.1016/j.jfineco.2012.11.006

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