Capital Structure and a Firm's Workforce
In this article, I propose a framework for understanding the unique impact of a firm’s workforce on its capital structure. Labor market frictions make financing labor different from 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 regulation, and face retirement risk. I explain the many implications of these labor market frictions for the firm’s financing choices. 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 through defined benefit pensions. New empirical research should use these underlying labor frictions as a lens through which to interpret observed interconnections between capital structure and labor market phenomena.
Matsa, David A.. 2017. Capital Structure and a Firm's Workforce.