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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
13014.
Length: Date of creation: Apr 2007 Date of revision: Handle: RePEc:nbr:nberwo:13014
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Find related papers by JEL classification: G3 - Financial Economics - - Corporate Finance and Governance G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure 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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References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Milton Harris & Bengt Holmstrom, 1981.
"A Theory of Wage Dynamics,"
Discussion Papers
488, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
[Downloadable!]
Alan Krueger, 1999.
"Measuring Labor's Share,"
Working Papers
792, Princeton University, Department of Economics, Industrial Relations Section..
[Downloadable!]
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Cited by: (explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)
Cronqvist, Henrik & Heyman, Fredrik & Nilsson, Mattias & Svaleryd, Helena & Vlachos, Jonas, 2007.
"Do Entrenched Managers Pay Their Workers More?,"
Working Paper Series
2007-7, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
[Downloadable!]
Cronqvist, Henrik & Heyman, Fredrik & Nilsson, Mattias & Svaleryd, Helena & Vlachos, Jonas, 2006.
"Do Entrenched Managers Pay Their Workers More?,"
Working Paper Series
2005-23, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
[Downloadable!]