A Structural Model of Human Capital and Leverage - Duke ...

(2001). Atkeson, Khan, and Ohanian (1996) provide discussion justifying this parameter choice. I set αn = .6
to match the average ratio of labor expense to assets in my sample. This value is also consistent with labor’s
share of output in the aggregate.
It is also standard in the literature to specify the technology shocks to be an AR(1) process in logs. As
such, I set
log(z ′ ) = ρzlog(z) + σzɛ ′ , (33)
where ɛ ′ is distributed standard normal. I set ρz = .684 as in Hennessy and Whited (2007). The conditional
volatility of productivity varies significantly in the literature and is not directly comparable across different
production functions. As a baseline I set σz = .092.
The fixed costs of production deduct directly from the firm’s operating profits and are therefore important
for matching firm value. As in Zhang (2005), for each simulation I set fixed costs to target the average Tobin’s
Q in the data, which leads to a baseline level of fixed costs f0 = .1. I set δk = .15 to match the average rate
of depreciation and δn = .15 to match the average rate of voluntary turnover in the manufacturing sector
from the Bureau of Labor Statistics Job Opening and Labor Turnover Survey (JOLTS).
The calibration of the tax environment and equity issuance costs follows Hennessy and Whited (2007)
closely. As in their paper, the maximum corporate tax rate is set equal to 40%, while the minimum rate is
20%, and the tax rate on interest income is set to 29%. I set the tax rate on dividend income to 12%. This
differs somewhat from Hennessy and Whited (2007) in that they specify a convex dividend tax schedule with
a maximum rate of 12%. Fixed costs of equity issuance are set to .02 to target the average frequency of equity
issuance as reported in Hennessy and Whited (2005) and Hennessy and Whited (2007). Similarly, quadratic
costs of equity issuance are set to .36 targeting the average equity issuance to assets ratio. Proportional costs
of issuance are set equal to .1, very close to the value of .091 estimated by Hennessy and Whited (2007).
Proportional default costs are set equal to .05. This value is lower than those typically used in the
literature, but is consistent with the low estimates of direct default costs measured in the empirical literature
(Weiss 1990, Andrade and Kaplan 1998). There is not a lot of guidance in selecting the proportion of jobs
lost in default. As a baseline I choose to set ξn = 0.3. 9
The probability of a successful job search is set to approximate the present value wage loss of employ-
ees who are laid off. Jacobson, LaLonde, and Sullivan (1993) study a panel of employees who are laid off
from distressed firms and finds long-term wage losses equal to 25%. Their paper focuses on long-tenured
9 This parameter, as well as the proportional default costs, are chosen to approximate costs that would occur in default on
average, not conditional on liquidation, as mentioned above.
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