Research Details

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.

Type

Article

Author(s)

Ashwini Agrawai, David A. Matsa

Date Published

2013

Citations

Agrawai, Ashwini, and David A. Matsa. 2013. Labor Unemployment Risk and Corporate Financing Decisions. Journal of Financial Economics.(2): 449-470.