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Firm-Specific Human Capital and Optimal Capital Structure

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  • Jaggia, Priscilla Butt
  • Thakor, Anjan V

Abstract

The authors consider the moral hazard in managers undersupplying imperfectly-marketable, firm-specific human capital. Firms may cope by granting long-term wage contracts that protect managers against employment termination. Although ex ante efficient, these contracts may be ex post inefficient when managerial ability is discovered to be low. Precommitted firms must honor these contracts, unless there is ownership transfer that permits their legal invalidation. Bankruptcy is one such transfer mechanism. Since managers anticipate the contractual consequence of bankruptcy, leverage worsens moral hazard; this cost provides a counterbalance to the debt tax shield and leads to an optimal capital structure. Copyright 1994 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Suggested Citation

  • Jaggia, Priscilla Butt & Thakor, Anjan V, 1994. "Firm-Specific Human Capital and Optimal Capital Structure," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(2), pages 283-308, May.
  • Handle: RePEc:ier:iecrev:v:35:y:1994:i:2:p:283-308
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    Cited by:

    1. Osano, Hiroshi, 2004. "Stock options and employees' firm-specific human capital under the threat of divestitures and acquisitions," Journal of Corporate Finance, Elsevier, vol. 10(4), pages 615-638, September.
    2. Bamiatzi, Vassiliki & Efthyvoulou, Georgios & Jabbour, Liza, 2017. "Foreign vs domestic ownership on debt reduction: An investigation of acquisition targets in Italy and Spain," International Business Review, Elsevier, vol. 26(5), pages 801-815.
    3. Arnoud W.A. Boot & Anjan V. Thakor, 2003. "Disagreement and Flexibility: A Theory of Optimal Security Issuance and Capital Structure," Tinbergen Institute Discussion Papers 03-001/2, Tinbergen Institute.
    4. Jason Allen & James R. Thompson, 2016. "Capital Structure, Pay Structure and Job Termination," Staff Working Papers 16-12, Bank of Canada.
    5. Sinclair-Desgagne, Bernard & Cadot, Olivier, 2000. "Career Concerns and the Acquisition of Firm-Specific Skills," Journal of the Japanese and International Economies, Elsevier, vol. 14(3), pages 204-217, September.
    6. Thakor, Anjan V., 1996. "The design of financial systems: An overview," Journal of Banking & Finance, Elsevier, vol. 20(5), pages 917-948, June.
    7. Bae, Kee-Hong & Kang, Jun-Koo & Wang, Jin, 2011. "Employee treatment and firm leverage: A test of the stakeholder theory of capital structure," Journal of Financial Economics, Elsevier, vol. 100(1), pages 130-153, April.
    8. repec:spr:busres:v:11:y:2018:i:1:d:10.1007_s40685-017-0054-y is not listed on IDEAS
    9. Xiaozu Wang & Tian Zhu, 2004. "Specific Human Capital, Credible Commitment and Optimal Capital Structure," Annals of Economics and Finance, Society for AEF, vol. 5(1), pages 47-59, May.
    10. Murray Z. Frank & Vidhan K. Goyal, 2009. "Capital Structure Decisions: Which Factors Are Reliably Important?," Financial Management, Financial Management Association International, vol. 38(1), pages 1-37, March.
    11. 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.
    12. Nuri Ersahin & Rustom M. Irani, 2015. "Collateral Values and Corporate Employment," Working Papers 15-30, Center for Economic Studies, U.S. Census Bureau.
    13. Timothy E. Dore & Rebecca Zarutskie, 2018. "Firm Leverage, Labor Market Size, and Employee Pay," Working Papers 18-36, Center for Economic Studies, U.S. Census Bureau.
    14. Nuri Ersahin & Rustom M. Irani, 2015. "Collateral Values and Corporate Employment," Working Papers 15-30r, Center for Economic Studies, U.S. Census Bureau.
    15. Hiroshi Osano, 2001. "Stock Options and Employees' Firm-Specific Human Capital under the Threat of Divesture and Aquisition," Working Papers 01-10, Ohio State University, Department of Economics.
    16. 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.
    17. Christophe Moussu, 2000. "Endettement, accords implicites et capital organisationnel : vers une théorie organisationnelle de la structure financière," Revue Finance Contrôle Stratégie, revues.org, vol. 3(2), pages 167-196, June.
    18. Akyol, Ali C. & Verwijmeren, Patrick, 2013. "Human capital costs, firm leverage, and unemployment rates," Journal of Financial Intermediation, Elsevier, vol. 22(3), pages 464-481.
    19. Ryen, Glen T. & Vasconcellos, Geraldo M. & Kish, Richard J., 1997. "Capital structure decisions: What have we learned?," Business Horizons, Elsevier, vol. 40(5), pages 41-50.
    20. Christophe Moussu, 2000. "Endettement, accords implicites et capital organisationnel: vers une théorie organisationnelle de la structure financière," Working Papers CREGO 1000602, Université de Bourgogne - CREGO EA7317 Centre de recherches en gestion des organisations.

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