Human Capital, Bankruptcy, and Capital Structure
AbstractWe derive the optimal labor contract for a levered firm in an economy with perfectly competitive capital and labor markets. Employees become entrenched under this contract and so face large human costs of bankruptcy. The firm's optimal capital structure therefore depends on the trade-off between these human costs and the tax benefits of debt. Optimal debt levels consistent with those observed in practice emerge without relying on frictions such as moral hazard or asymmetric information. Consistent with empirical evidence, persistent idiosyncratic differences in leverage across firms also result. In addition, wages should have explanatory power for firm leverage. Copyright (c) 2010 the American Finance Association.
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Bibliographic InfoArticle provided by American Finance Association in its journal The Journal of Finance.
Volume (Year): 65 (2010)
Issue (Month): 3 (06)
Other versions of this item:
- G3 - Financial Economics - - Corporate Finance and Governance
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
- G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
- J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
- J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
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