Employment Flexibility and Capital Structure
Author | : Olga Kuzmina |
Publisher | : |
Total Pages | : 59 |
Release | : 2018 |
ISBN-10 | : OCLC:1304494373 |
ISBN-13 | : |
Rating | : 4/5 (73 Downloads) |
Book excerpt: I exploit the variation in labor market programs in Spain to show that the use of more flexible (shorter and cheaper-to-fire) employment contracts increases a firm's debt capacity by reducing its operating leverage and probability of default. I use specific institutional features to separate this explanation from the labor bargaining channel. I further show that the result is stronger for firms that suffer most in bankruptcy, and that in downturns firms downsize using flexible labor, suggesting that employment contract structure is a significant component of expected default costs and of operating flexibility. Finally, firms respond with higher flows of both credit and equity, consistent with flexible contracts also relaxing financial constraints.