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Human capital, capital structure, and employee pay: An empirical analysis

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  • Chemmanur, Thomas J.
  • Cheng, Yingmei
  • Zhang, Tianming

Abstract

We test the predictions of Titman (1984) and Berk, Stanton, and Zechner (2010) by examining the effect of leverage on labor costs. Leverage has a significantly positive impact on cash, equity-based, and total compensation of chief executive officers (CEOs). Compensation of new CEOs hired from outside the firm is positively related to prior-year firm leverage. In addition, leverage has a positive and significant impact on average employee pay. The incremental total labor expenses associated with an increase in leverage are large enough to offset the incremental tax benefits of debt. The empirical evidence supports the theoretical prediction that labor costs limit the use of debt.

Suggested Citation

  • Chemmanur, Thomas J. & Cheng, Yingmei & Zhang, Tianming, 2013. "Human capital, capital structure, and employee pay: An empirical analysis," Journal of Financial Economics, Elsevier, vol. 110(2), pages 478-502.
    • Handle: RePEc:eee:jfinec:v:110:y:2013:i:2:p:478-502
    DOI: 10.1016/j.jfineco.2013.07.003
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    More about this item

    Keywords

    Capital structure; Human capital; Labor costs;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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