Labor unemployment risk and corporate financing decisions
Ashwini Agrawal and
David A. Matsa
LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library
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; unemployed risk; compensating wage differential (search for similar items in EconPapers)
JEL-codes: G32 G33 J31 J65 (search for similar items in EconPapers)
Date: 2013-05-01
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Citations: View citations in EconPapers (167)
Published in Journal of Financial Economics, 1, May, 2013, 108(2), pp. 449-470. ISSN: 0304-405X
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http://eprints.lse.ac.uk/69608/ Open access version. (application/pdf)
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Journal Article: Labor unemployment risk and corporate financing decisions (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:69608
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