Working Paper: NBER ID: w25125
Authors: David A. Matsa
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: capital structure; workforce; labor market frictions; financing decisions
JEL Codes: G32; J31; J32; J33; J38; J51; J52; J63; J65; J68; M51; M52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| high leverage (G19) | job security (J28) |
| job security (J28) | bargaining power (C79) |
| bargaining power (C79) | firm's ability to manage labor costs (M51) |
| high leverage (G19) | higher unemployment costs for workers (J65) |
| higher unemployment costs for workers (J65) | firms offer higher wages or better conditions (J33) |
| maturing long-term debt (G32) | reduce labor force (J22) |
| financial distress (G33) | employment levels (J23) |
| labor market frictions (J29) | financing decisions (G32) |
| job satisfaction and employee turnover (J63) | capital structure choices (G32) |