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Labor unemployment risk and corporate financing decisions

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

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.

Suggested Citation

  • Agrawal, Ashwini K. & Matsa, David A., 2013. "Labor unemployment risk and corporate financing decisions," Journal of Financial Economics, Elsevier, vol. 108(2), pages 449-470.
  • Handle: RePEc:eee:jfinec:v:108:y:2013:i:2:p:449-470 DOI: 10.1016/j.jfineco.2012.11.006
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    1. John, Kose & Knyazeva, Anzhela & Knyazeva, Diana, 2015. "Employee rights and acquisitions," Journal of Financial Economics, Elsevier, vol. 118(1), pages 49-69.
    2. Andrew Ellul & Marco Pagano & Fabiano Schivardi, 2014. "Employment and Wage Insurance within Firms - Worldwide Evidence," EIEF Working Papers Series 1402, Einaudi Institute for Economics and Finance (EIEF), revised Sep 2017.
    3. Marco Pagano & Luca Picariello, 2017. "Talent Discovery, Layoff Risk and Unemployment Insurance," EIEF Working Papers Series 1710, Einaudi Institute for Economics and Finance (EIEF), revised Aug 2017.
    4. John (Jianqiu) Bai & Daniel Carvalho & Gordon Phillips*, 2016. "The Impact of Bank Credit on Labor Reallocation and Aggregate Industry Productivity," Working Papers 16-26, Center for Economic Studies, U.S. Census Bureau.
    5. Fátima Herranz González & Carmen Martínez-Carrascal, 2017. "The impact of firms’ financial position on fixed investment and employment. An analysis for Spain," Working Papers 1714, Banco de España;Working Papers Homepage.
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    7. Marco Di Maggio & Amir Kermani, 2016. "The Importance of Unemployment Insurance as an Automatic Stabilizer," NBER Working Papers 22625, National Bureau of Economic Research, Inc.
    8. Azizjon Alimov, 2015. "Labor Protection Laws and Bank Loan Contracting," Journal of Law and Economics, University of Chicago Press, vol. 58(1), pages 37-74.
    9. Dou, Yiwei & Khan, Mozaffar & Zou, Youli, 2016. "Labor unemployment insurance and earnings management," Journal of Accounting and Economics, Elsevier, vol. 61(1), pages 166-184.
    10. Oliveira, Mauro & Kadapakkam, Palani-Rajan & Beyhaghi, Mehdi, 2017. "Effects of customer financial distress on supplier capital structure," Journal of Corporate Finance, Elsevier, vol. 42(C), pages 131-149.
    11. Joanne W. Hsu & David A. Matsa & Brian T. Melzer, 2014. "Positive Externalities of Social Insurance: Unemployment Insurance and Consumer Credit," NBER Working Papers 20353, National Bureau of Economic Research, Inc.
    12. Chino, Atsushi, 2016. "Do labor unions affect firm payout policy?: Operating leverage and rent extraction effects," Journal of Corporate Finance, Elsevier, vol. 41(C), pages 156-178.
    13. USHIJIMA Tatsuo, 2016. "Corporate Diversification, Employee Bargaining Power, and Wages," Discussion papers 16103, Research Institute of Economy, Trade and Industry (RIETI).
    14. Robin Döttling & Tomislav Ladika & Enrico Perotti, 2016. "The (Self-)Funding of Intangibles," Tinbergen Institute Discussion Papers 16-093/IV, Tinbergen Institute.
    15. Ethan Rouen, 2017. "Rethinking Measurement of Pay Disparity and its Relation to Firm Performance," Harvard Business School Working Papers 18-007, Harvard Business School.
    16. Nuri Ersahin & Rustom M. Irani & Hanh Le, 2015. "Creditor Control Rights and Resource Allocation within Firms," Working Papers 15-39, Center for Economic Studies, U.S. Census Bureau.
    17. Liang, J. Nellie & Falato, Antonio, 2013. "Do Creditor Rights Increase Employment Risk? Evidence from Loan Covenants," Finance and Economics Discussion Series 2014-61, Board of Governors of the Federal Reserve System (U.S.).
    18. Ellul, Andrew & Wang, Cong & Zhang, Kuo, 2016. "Labor Unemployment Risk and CEO Incentive Compensation," CEPR Discussion Papers 11634, C.E.P.R. Discussion Papers.
    19. 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.
    20. Ghaly, Mohamed & Dang, Viet Anh & Stathopoulos, Konstantinos, 2015. "Cash holdings and employee welfare," Journal of Corporate Finance, Elsevier, vol. 33(C), pages 53-70.
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    22. Chen, Jie & Leung, Woon Sau & Evans, Kevin P., 2016. "Are employee-friendly workplaces conducive to innovation?," Journal of Corporate Finance, Elsevier, vol. 40(C), pages 61-79.

    More about this item

    Keywords

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

    JEL classification:

    • 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
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings

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