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Human Capital, Bankruptcy and Capital Structure

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Listed:
  • 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.

Suggested Citation

  • Jonathan B. Berk & Richard Stanton & Josef Zechner, 2007. "Human Capital, Bankruptcy and Capital Structure," NBER Working Papers 13014, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:13014
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • G3 - Financial Economics - - Corporate Finance and Governance
    • 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
    • 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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