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

ecoming unemployed drops, so it becomes less costly for firms to compensate workers for bearing unem-
ployment risk. Agrawal and Matsa (2010) show that firms increase their leverage when their workers receive
improvements in state unemployment benefits. I provide evidence from a structural model that complements
their empirical evidence.
In one of the early papers in this literature Hanka (1998) presents some of the first evidence on the
relationship between corporate debt and the terms of employment. He finds that firms with higher debt have
larger and more frequent reductions in employment, a higher propensity to use part time employees, and
pay lower wages. Interestingly, he finds that these relationships appear to have emerged around 1970 and
strengthened over time, a period during which the importance of human capital for firm production increased
dramatically (Acemoglu 2002). Thus, as human capital has become more important for firms, its effect on
firm policies has increased. Given this evidence, it is reasonable to expect the effects emphasized in my paper
to be of increasing importance going forward.
Matsa (2010) studies the interaction between labor and capital structure in a setting with collective
bargaining. He uses changes in states’ collective bargaining laws to show that an increase in union bargaining
power leads to significant increases in leverage. The interpretation is that capital structure is used by the
firm as a strategic variable to influence wage negotiation. By pledging cash flows to debt holders, the
firm decreases the size of the pie over which unionized workers will bargain. Hennessy and Livdan (2009)
formalize this intuition in a model of firm-supplier bargaining. In their paper, the relationship between a firm
and its workers is governed by implicit relational contracts. By selling debt, firms increase their share of the
relationship surplus. However, with a smaller remaining surplus, there is a smaller range of credible payments
with which to supply incentives to the workers. Reduced incentives offset the firm’s increased share, leading
to an interior debt solution. Simintzi, Vig, and Volpin (2010) argue that the theoretical prediction that an
increase in employee bargaining power leads to an increase in leverage relies on the assumption that debt is
not renegotiable. When debt is renegotiable, an increase in employee bargaining power leads to a decrease in
leverage. The intuition given is that more employee bargaining power leads to higher operating leverage in
the form of wages, which crowds out financial leverage. They test their prediction using cross-country data
and find support for a negative relationship between employee bargaining power and leverage. In contrast to
Matsa (2010), Simintzi, Vig, and Volpin (2010) do not focus on settings with collective bargaining.
Benmelech, Bergman, and Seru (2011) study the interaction between financial constraints and hiring using
an approach similar to that used in the literature on investment-cash flow sensitivity. They find that hiring
is sensitive to cash flow and that this sensitivity is higher for firms that are more financially constrained.
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