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Human Capital, Bankruptcy and Capital Structure

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  • Jonathan B. Berk
  • Richard Stanton
  • Josef Zechner

Abstract

We derive a firm's optimal capital structure and managerial compensation contract when employees are averse to bearing their own human capital risk, while equity holders can diversify this risk away. In the presence of corporate taxes, our model delivers optimal debt levels consistent with those observed in practice. It also makes a number of predictions for the cross-sectional distribution of firm leverage. Consistent with existing empirical evidence, it implies persistent idiosyncratic differences in leverage across firms. An important new empirical prediction of the model is that, ceteris paribus, firms with more leverage should pay higher wages.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13014.

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Date of creation: Apr 2007
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Publication status: published as Berk, Jonathan B., Richard Stanton,and Josef Zechner. "Human Capital, Bankruptcy and Capital Structure." Journal of Finance 65, 3 (June 2010): 891-926.
Handle: RePEc:nbr:nberwo:13014

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