Labor unemployment risk and corporate financing decisions

Agrawal, Ashwini K. and Matsa, David A. (2013) Labor unemployment risk and corporate financing decisions. Journal of Financial Economics, 108 (2). pp. 449-470. ISSN 0304-405X

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Abstract

This paper presents evidence that firms choose conservative financial policies partly to mitigate workers' exposure to unemployment risk. We exploit changes in state unemployment insurance laws as a source of variation in the costs borne by workers during layoff spells. We find that higher unemployment benefits lead to increased corporate leverage, particularly for labor-intensive and financially constrained firms. We estimate the ex ante, indirect costs of financial distress due to unemployment risk to be about 60 basis points of firm value for a typical BBB-rated firm. The findings suggest that labor market frictions have a significant impact on corporate financing decisions.

Item Type:	Article
Official URL:	https://www.journals.elsevier.com/journal-of-finan...
Additional Information:	© 2012 Elsevier B.V.
Divisions:	Finance
Subjects:	H Social Sciences > HD Industries. Land use. Labor H Social Sciences > HD Industries. Land use. Labor > HD61 Risk Management H Social Sciences > HG Finance
JEL classification:	G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure G - Financial Economics > G3 - Corporate Finance and Governance > G33 - Bankruptcy; Liquidation J - Labor and Demographic Economics > J3 - Wages, Compensation, and Labor Costs > J31 - Wage Level and Structure; Wage Differentials by Skill, Training, Occupation, etc. J - Labor and Demographic Economics > J6 - Mobility, Unemployment, and Vacancies > J65 - Unemployment Insurance; Severance Pay; Plant Closings
Date Deposited:	01 Mar 2017 15:33
Last Modified:	08 May 2024 19:12
URI:	http://eprints.lse.ac.uk/id/eprint/69608

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