Labor Unemployment Risk And Corporate Financing Decisions
Source: New York University
This paper examines the impact of labor unemployment risk on corporate financing decisions. Theory suggests that firms choose conservative financial policies partly as a means of mitigating worker exposure to unemployment risk. Using changes in state unemployment insurance benefit laws as a source of variation in the costs borne by workers during layoff spells, they explore the connection between unemployment risk and the corporate financing decisions of public firms in the United States. The authors find that increases in legally mandated unemployment benefits lead to increases in corporate leverage. The impact of reduced unemployment risk on financial policy is especially strong for firms that have greater layoff separation rates, labor intensity, and financing constraints.