Labor-Capital Substitution and Capital Structure: Evidence from Automation
75 Pages Posted: 24 Apr 2020 Last revised: 13 May 2021
Date Written: May 29, 2020
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: Suggested Citation