Downward Wage Rigidity, Corporate Investment, and Firm Value

Operating Leverage and Underinvestment

“…This finding is shared with recent empirical studies (Cho ; Marciukaityte ). These studies normally take advantage of labor market friction to capture operating leverage; thus, they are relatively immune to the endogeneity curse brought by regression exercises on corporate investments.…”

“…In particular, the former is generated by fixed or quasi‐fixed operating costs, whereas the latter is characterized by coupon payments. Recently, a strand of the empirical literature has documented that operating leverage can undermine a firm's incentive to undertake capital investments (Cho ; Gustafson and Kotter ). This result is parallel to the well‐established fact that financial leverage also has a negative impact on corporate investments (Myers ; Diamond and He ).…”

“…Kumar and Yerramilli () study substitution between the two types of leverages on the endogenous capital structure and capacity choice. In particular, Cho () investigates the effects of downward wage rigidity (DWR) on capital expenditures. This study shows a negative DWR–investment relation, and it attributes this to both operating leverage and the debt overhang channel.…”

The Evolution of Technological Substitution in Low-Wage Labor Markets

“…Consequently, the total employment loss associated with an occupation's routinenesswhether manual or cognitiveis twice as large now as it was in the decade prior to the Financial Crisis. 1 Chen, 2019;Cho, 2018;Geng et al, 2018;Gustafson and Kotter, 2018;Hau et al, 2018;and Qiu and Dai, 2019 directly examine firm capital expenditures following minimum wage hikes. The majority, but not all, of these studies find that minimum wage hikes expedite the adoption of labor-saving capital.…”

“…State-Level Minimum Wage Changes, 2010-2018 This table shows the Wage Group 3 and 4 coefficients for the regressions presented in Table3. See Table3for more details.…”