Threats to Human Capital : The Effect of Health Risk on Corporate Financial Policy

We study the impact of threats to human capital on the determination of corporate financial policy. We exploit variations in health conditions using morbidity and mortality by infectious diseases and document the relationship between employee well-being and firm financing decisions. Deterioration in health causes declines in leverage by increasing human capital costs that offset the benefits of debt. When employees value human capital insurance more due to disease-induced rise in human capital costs, firms strategically respond by reducing corporate debt to enhance risk sharing with employees. This effect is more pronounced in technology firms, distressed firms, firms with a greater share of labor and at times with higher disease-induced labor uncertainty, but it is moderated when employees are better protected by labor unions