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Annual Review of Financial Economics

Volume 10, 2018

Capital Structure and a Firm's Workforce

Abstract

While businesses require funding to start and grow, they also rely on human capital, which affects how they raise funds. Labor market frictions make financing labor different than financing capital. Unlike capital, labor cannot be owned and can act strategically. Workers face unemployment costs, can negotiate for higher wages, are protected by employment regulations, and face retirement risk. I propose using these frictions as a framework for understanding the unique impact of a firm's workforce on its capital structure. For instance, high leverage often makes managing labor more difficult by undermining employees’ job security and increasing the need for costly workforce reductions. But firms can also use leverage to their advantage, such as in labor negotiations and defined benefit pensions. This research can help firms account for the needs and management of their workforce when making financing decisions.

Keyword(s): corporate debt, employment protection, JEL G32, JEL J31, JEL J32, JEL J33, JEL J38, JEL J51, JEL J52, JEL J63, JEL J65, JEL J68, JEL M51, JEL M52, labor bargaining, leverage, pensions, unemployment
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2018-11-01
2024-05-01
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Capital Structure and a Firm's Workforce
Annual Review of Financial Economics 10, 387 (2018); https://doi.org/10.1146/annurev-financial-110716-032519
/content/journals/10.1146/annurev-financial-110716-032519
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