A Theory of Net Debt and Transferable Human Capital

Abstract

Traditional theories of capital structure do not explain the puzzling phenomena of zero-leverage firms and negative net debt ratios. We develop a theory where firms adopt a net debt target that acts as a balancing variable between equityholders and managers. Negative (positive) net debt occurs in human (physical) capital intensive industries. Negative net debt arises because tradeable claims cannot be issued against transferable human capital. Heterogeneity in capital structure occurs when firms have debt that is not fully collateralized. Physical capital intensive firms take on high leverage but may underlever to avoid bankruptcy costs. This creates excess rents for managers (even if the supply of human capital is competitive) because wealth constraints prevent managers from co-investing.Keywords: capital structure, net debt, human capital (JEL: G31, G32) * We thank Shantanu Banerjee, Erwan Morellec, Stewart Myers, the anonymous referee and par-

The Impact of Internationalization on Zero Leverage: Evidence from the UK

“…Recent studies build upon existing capital structure research (Frank andGoyal, 2003, 2009;Myers, 1977;Rajan and Zingales, 1995;Titman and Wessels, 1988) in an attempt to explain this empirical irregularity. These studies analyse the zero leverage phenomenon by examining firm-level fundamentals (Devos et al, 2012), macro-economic variables (Dang, 2013), corporate governance mechanisms and the level of managerial entrenchment (Byoun and Xu, 2013;Devos et al, 2012;Strebulaev and Yang, 2013), the intensity of human capital in industries (Lambrecht and Pawlina, 2013), and, finally, the long-run performance of zero leverage firms (Lee and Moon 2011). Devos et al (2012) find that the zero leverage decision of US firms is not related to governance mechanisms or managerial entrenchment.…”