Labor Unemployment Risk and Corporate Financing Decisions
This paper examines the impact of labor unemployment risk on corporatefinancing decisions. Theory suggests that firms choose conservativefinancial policies partly as a means of mitigating worker exposure tounemployment risk. Using changes in state unemployment insurance benefitlaws as a source of variation in the costs borne by workers duringlayoff spells, we explore the connection between unemployment risk andthe corporate financing decisions of public firms in the United States.We find that increases in legally mandated unemployment benefits lead toincreases in corporate leverage. The impact of reduced unemployment riskon financial policy is especially strong for firms that have greaterlayoff separation rates, labor intensity, and financing constraints. Theestimated premium required to compensate workers for unemployment riskdue to financial distress is about 57 basis points of firm value for aBBB-rated firm. These findings suggest that labor market frictions havea significant impact on corporate financing decisions.
Year of publication: |
2010-11-22
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Authors: | Agrawal, Ashwini K. ; Matsa, David A. |
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