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Labor unemployment risk and corporate financing decisions

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  • Agrawal, Ashwini K.
  • Matsa, David A.
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    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.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Financial Economics.

    Volume (Year): 108 (2013)
    Issue (Month): 2 ()
    Pages: 449-470

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    Handle: RePEc:eee:jfinec:v:108:y:2013:i:2:p:449-470

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    Web page: http://www.elsevier.com/locate/inca/505576

    Related research

    Keywords: Capital structure; Financial distress; Unemployment risk; Compensating wage differentials;

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    Cited by:
    1. Jennifer Brown & David A. Matsa, 2012. "Boarding a Sinking Ship? An Investigation of Job Applications to Distressed Firms," NBER Working Papers 18208, National Bureau of Economic Research, Inc.

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