How Does Labor Market Size Affect Firm Capital Structure? Evidence from Large Plant Openings

52 Pages Posted: 14 Nov 2015

See all articles by Hyunseob Kim

Hyunseob Kim

Cornell University - Samuel Curtis Johnson Graduate School of Management

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Date Written: November 1, 2015

Abstract

I examine how the labor market in which firms operate affects their capital structure decisions. Using the US Census Bureau data, I exploit 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 a 2.6% to 3.9% increase in the debt-to-capital ratio of existing firms in the “winner” county relative to the “runner-up” choice. This result is consistent with larger labor markets making a job loss less costly, which in turn reduces indirect costs of financial distress. Moreover, this spillover effect is larger for firms 1) that have a larger fraction of employees in the affected county, 2) that employ the same type of workers as the new plant, and 3) that have larger unexploited benefits of debt.

Suggested Citation

Kim, Hyunseob, How Does Labor Market Size Affect Firm Capital Structure? Evidence from Large Plant Openings (November 1, 2015). US Census Bureau Center for Economic Studies Paper No. CES-WP-15-38, Available at SSRN: https://ssrn.com/abstract=2689865 or http://dx.doi.org/10.2139/ssrn.2689865

Hyunseob Kim (Contact Author)

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States

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