Labor-Capital Substitution and Capital Structure: Evidence from Automation

75 Pages Posted: 24 Apr 2020 Last revised: 13 May 2021

See all articles by Jiaping Qiu

Jiaping Qiu

McMaster University - Michael G. DeGroote School of Business

Chi Wan

University of Massachusetts Boston - Department of Accounting and Finance

Yan Wang

McMaster University

Date Written: May 29, 2020

Abstract

This paper presents evidence that the exposure to automation technologies has a positive impact
on a firm’s financial leverage. The effects are more pronounced in firms with greater labor costs,
routine task intensity, firing costs, and union coverage. The results are robust when we instrument
a firm’s exposure to automation technologies using the robotics adoption in European countries.
Our analysis suggests that the exposure to automation technologies creates a replacement threat
that weakens workers’ bargaining power, compressing their wage premiums for bearing financial
distress risk and reducing wage rigidity, both of which allow firms to increase financial leverage.

Keywords: automation, capital structure, labor economics, financial leverage, wage rigidity

JEL Classification: G32, G33, J30, O31, O33

Suggested Citation

Qiu, Jiaping and Wan, Chi and Wang, Yan, Labor-Capital Substitution and Capital Structure: Evidence from Automation (May 29, 2020). Available at SSRN: https://ssrn.com/abstract=3571489 or http://dx.doi.org/10.2139/ssrn.3571489

Jiaping Qiu

McMaster University - Michael G. DeGroote School of Business ( email )

1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada

Chi Wan

University of Massachusetts Boston - Department of Accounting and Finance ( email )

Boston, MA 02125
United States

Yan Wang (Contact Author)

McMaster University ( email )

1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada

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