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Labor-Replacing Automation and Finance

Author

Listed:
  • Xin Cheng

    (School of Public Administration, Zhongnan University of Economics and Law, Wuhan 430070, China)

  • Evgeny Lyandres

    (Coller School of Management, Tel Aviv University, Ramat Aviv 6997801, Israel; and Monash Business School, Monash University, Caulfield East, Victoria 3145, Australia)

  • Kaiguo Zhou

    (School of Finance, Capital University of Economics and Business, Beijing 100070, China)

  • Tong Zhou

    (College of Business, Southern University of Science and Technology, Shenzhen 518055, China)

Abstract

We examine the effects of adoption of labor-replacing automation technology on corporate financing. Empirically, using Chinese firm-level panel data on deployment of industrial robots as an example of such automation, we find that robot adoption increases leverage and reduces cost of debt. We hypothesize that the underlying reason is that being a substitute for labor, automation provides a hedge against fluctuations in labor costs. A model based on this hedging argument delivers additional testable predictions concerning determinants of the relation between automation and corporate financing. These relations are borne out in the data, providing support for the proposed mechanism. Our evidence is inconsistent with alternative channels behind the observed relations.

Suggested Citation

  • Xin Cheng & Evgeny Lyandres & Kaiguo Zhou & Tong Zhou, 2025. "Labor-Replacing Automation and Finance," Management Science, INFORMS, vol. 71(8), pages 6997-7028, August.
    • Handle: RePEc:inm:ormnsc:v:71:y:2025:i:8:p:6997-7028
    DOI: 10.1287/mnsc.2022.02658
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