How Does Labor Market Size Affect Firm Capital Structure? Evidence from Large Plant Openings
60 Pages Posted: 18 Sep 2012 Last revised: 2 Nov 2019
Date Written: August 14, 2019
I examine how the labor market in which firms operate affects their capital structure decisions. Based on US Census Bureau data and information on companies’ decisions to locate their new operations, I use a large plant opening as an abrupt increase in the size of a local labor market. I find that a new plant opening leads to an increase of 2.5 to 3.9 percentage points in the debt-to-capital ratio of existing firms in the "winner" county relative to the "runner-up" choice. This result is consistent with the argument that larger labor markets make job loss less costly, which in turn reduces the indirect costs of financial distress. Notably, this spillover effect is larger for firms that employ the same type of workers as the new plant in the affected county.
Keywords: local labor markets, corporate capital structure, search frictions, agglomeration
JEL Classification: G32, J61, J31, J64, R12, G33
Suggested Citation: Suggested Citation