Labor unemployment risk and corporate financing decisions

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.JEL classification: G32, G33, J31, J65

Unemployment Insurance as a Housing Market Stabilizer

“…Following Agrawal and Matsa (2013), we measure the generosity of each state's UI benefits annually using the product of the maximum weekly benefit amount and the maximum benefit duration (in weeks). Although we focus on this measure ("Max Benefit") throughout much of our analysis, the results are robust to a wide range of other measures of benefit generosity, as described in Section IIB.…”

Exploration for Human Capital: Theory and Evidence from the MBA Labor Market

“…For example, the firms' workforce characteristics have been shown to influence capital structure choices, theoretically and empirically (e.g., Berk, Stanton and Zechner (2010), Agrawal and Matsa (2011)), as well as the cost of capital (Eisfeldt and Papanikolaou (forthcoming)). The acquisition of productive labor, not just physical assets, is an important driver of M&A decisions (Ouimet and Zarutskie (2011)).…”

Talent Discovery, Layoff Risk and Unemployment Insurance

“…These are defined as the product of the maximal UI benefits and the respective maximal duration, measured in 2002 constant dollars using the Consumer Price Index (as done by Agrawal and Matsa, 2013), standardized by the average wage in the relevant sector, state and year. The data for UI benefits and duration are drawn from the "Significant Provision of State UI Laws" of the U.S. Department of Labor, and the data for average wage by sector, state and year are based on BLS data.…”