Hostname: page-component-6766d58669-76mfw Total loading time: 0 Render date: 2026-05-18T11:40:58.140Z Has data issue: false hasContentIssue false
  • English
  • Français

The Employee Clientele of Corporate Leverage: Evidence from Family Labor Income Diversification

Published online by Cambridge University Press:  23 January 2025

Jie (Jack) He Open the ORCID record for Jie (Jack) He [Opens in a new window] ,
Xiao (Shaun) Ren ,
Tao Shu  and
Huan Yang
Jie (Jack) He*
Affiliation:
University of Georgia Terry College of Business
Xiao (Shaun) Ren
Affiliation:
The Chinese University of Hong Kong, Shenzhen (CUHK Shenzhen) School of Management and Economics renxiao@cuhk.edu.cn
Tao Shu
Affiliation:
The Chinese University of Hong Kong CUHK Business School and ABFER taoshu@cuhk.edu.hk
Huan Yang
Affiliation:
University of Massachusetts, Amherst, passed away in December 2019
*
jiehe@uga.edu (corresponding author)
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the 'Save PDF' action button.

Consistent with theories on the equilibrium matching between capital structure and employee job risk aversion, we find a robust, positive association between a firm’s leverage and its employees’ family labor income diversification. Higher-Leverage firms also recruit new employees with greater income diversification. For identification, we exploit two policy shocks that exogenously change employee income diversification and firm leverage, respectively. Individual employee-level tests further reveal that workers with differential risk attitudes adjust their job choices and household labor income portfolios in response to significant shifts in their employers’ leverage. Finally, human bankruptcy costs contribute to the general level of corporate risk-taking.

Information

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 60 , Issue 7 , November 2025 , pp. 3154 - 3194
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (http://creativecommons.org/licenses/by/4.0), which permits unrestricted re-use, distribution and reproduction, provided the original article is properly cited.
Copyright
© The Author(s), 2025. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

Huan Yang, who was an Assistant Professor at the University of Massachusetts, Amherst, passed away in December 2019. This project would not have been possible without his years of dedicated work and invaluable contribution. We thank Jarrad Harford (the editor), an anonymous referee, Renee Adams, Ashwini Agrawal, Anup Agrawal, Heitor Almeida, Ilona Babenko, Melissa Banzhaf, Jonathan Berk, Philip Bond, Stephen Dimmock, Sudipto Dasgupta, Espen Eckbo, Andrew Ellul, Stu Gillan, Michael Hertzel, Sara Holland, Julie Hotchkiss, Feng Jiang, Ankit Kalda, Han Kim, Hyunseob Kim, Anzhela Knyazeva, Jongsub Lee, Ugur Lel, Inessa Liskovich, Ping Liu, David Matsa, Jeffry Netter, Luigi Pistaferri, Daniel Rattl, David Robinson, Amit Seru, Tao Shen, Xunhua Su, Geoffrey Tate, Sheridan Titman, Toni Whited, Wei Xiong, Sheng-Jun Xu, and Liu Yang for their helpful comments. We also appreciate the helpful comments from the 2020 Western Finance Association Meeting, 2019 European Finance Association Meeting, the 2019 China International Conference in Finance, the 2019 Northern Finance Association Meeting, the 2019 Finance Down Under Conference, 2017 Stanford Institute for Theoretical Economics Conference on Labor and Finance, the 2017 Conference of Financial Economics and Accounting, the 2017 SFS Finance Cavalcade Asia-Pacific, the 2017 Oslo Summer Workshop on Corporate Finance, the 2017 Financial Management Association Meeting, the 2017 Atlanta RDC Research Conference, as well as seminar participants at the University of Georgia, CUHK-Shenzhen, Chinese University of Hong Kong, and Iowa State University. Any views expressed are those of the authors and not those of the U.S. Census Bureau. The Census Bureau’s Disclosure Review Board and Disclosure Avoidance Officers have reviewed this information product for unauthorized disclosure of confidential information and have approved the disclosure avoidance practices applied to this release. This research was performed at a Federal Statistical Research Data Center under FSRDC Project Number 1091 (CBDRB-FY22-P1091-R9461). All results have been reviewed to ensure that no confidential information is disclosed. This research uses data from the Census Bureau’s Longitudinal Employer-Household Dynamics Program, which was partially supported by the following National Science Foundation Grants SES-9978093, SES-0339191 and ITR-0427889; National Institute on Aging Grant AG018854; and grants from the Alfred P. Sloan Foundation. Any errors and omissions are the responsibility of the authors.

References

Abowd, J. M.; Stephens, B. E.; Vilhuber, L.; Andersson, F.; McKinney, K. L.; Roemer, M.; and Woodcock, S.. “The LEHD Infrastructure Files and the Creation of the Quarterly Workforce Indicators.” In Producer Dynamics: New Evidence from Micro Data, Dunne, T., Jensen, J. B., and Roberts, M. J., eds. Chicago, IL: University of Chicago Press (2009), 149–230.CrossRefGoogle Scholar
Agrawal, A. K.; Hacamo, I.; and Hu, Z.. “Information Dispersion across Employees and Stock Return.” Review of Financial Studies, 34 (2018), 4785–4831.CrossRefGoogle Scholar
Agrawal, A. K., and Matsa, D. A.. “Labor Unemployment Risk and Corporate Financing Decisions.” Journal of Financial Economics, 108 (2013), 449–470.CrossRefGoogle Scholar
Altman, E. I. “Financial Ratios, Discriminant Analysis and the Prediction of Corporate Bankruptcy.” Journal of Finance, 23 (1968), 589–609.CrossRefGoogle Scholar
Atanassov, J., and Kim, E. H.. “Labor Laws and Corporate Governance: International Evidence from Restructuring Decisions.” Journal of Finance, 64 (2009), 341–374.CrossRefGoogle Scholar
Babenko, I., and Sen, R.. “Do Non-Executive Employees Have Information? Evidence from Employee Stock Purchase Plans.” Management Science, 27 (2016), 3658–3698.Google Scholar
Bae, K. H.; Kang, J. K.; and Wang, J.. “Employee Treatment and Firm Leverage: A Test of the Stakeholder Theory of Capital Structure.” Journal of Financial Economics, 100 (2011), 130–153.CrossRefGoogle Scholar
Baghai, R. P.; Silva, R. C.; Thell, V.; and Vig, V.. “Talent in Distressed Firms: Investigating the Labor Costs of Financial Distress.” Journal of Finance, 76 (2021), 2907–2961.CrossRefGoogle Scholar
Baum, C. L., and Ruhm, C. J.. “The Effects of Paid Family Leave in California on Labor Market Outcomes.” Journal of Policy Analysis and Management, 35 (2016), 333–356.CrossRefGoogle Scholar
Bedard, K., and Rossin-Slater, M.. “The Economic and Social Impacts of Paid Family Leave in California: Report for the California Employment Development Department.” Working Paper, University of California (2016).Google Scholar
Berger, P. G.; Ofek, E.; and Yermack, D. L.. “Managerial Entrenchment and Capital Structure Decisions.” Journal of Finance, 52 (1997), 1411–1438.CrossRefGoogle Scholar
Berk, J. B.; Stanton, R.; and Zechner, J.. “Human Capital, Bankruptcy, and Capital Structure.” Journal of Finance, 65 (2010), 891–926.CrossRefGoogle Scholar
Bharath, S. T., and Shumway, T.. “Forecasting Default with the Merton Distance to Default Model.” Review of Financial Studies, 21 (2008), 1339–1369.CrossRefGoogle Scholar
Brown, J., and Matsa, D. A.. “Boarding a Sinking Ship? An Investigation of Job Applications to Distressed Firms.” Journal of Finance, 71 (2016), 507–550.CrossRefGoogle Scholar
Byker, T. S. “Paid Parental Leave Laws in the United States: Does Short-Duration Leave Affect Women’s Labor-Force Attachment?” American Economic Review: Papers & Proceedings, 106 (2016), 242–246.CrossRefGoogle ScholarPubMed
Chava, S. and Roberts, M. R.. “How Does Financing Impact Investment? The Role of Debt Covenants.” Journal of Finance, 63 (2008), 2085–2121.CrossRefGoogle Scholar
Chemmanur, T. J; Cheng, Y.; and Zhang, T.. “Human Capital, Capital Structure, and Employee Pay: An Empirical Analysis.” Journal of Financial Economics, 110 (2013), 478–502.CrossRefGoogle Scholar
Chen, Z.; Harford, J.; and Kamara, A.. “Operating Leverage, Profitability, and Capital Structure.” Journal of Financial and Quantitative Analysis, 54 (2019), 369–392.CrossRefGoogle Scholar
David, S., and von Wachter, T.. “Recessions and the Costs of Job Loss.” Brookings Papers on Economic Activity, 43 (2011), 1–74.Google Scholar
Dewenter, K. L., and Malatesta, P. H.. “State-Owned and Privately Owned Firms: An Empirical Analysis of Profitability, Leverage, and Labor Intensity.” American Economic Review, 91 (2001), 320–334.CrossRefGoogle Scholar
Di Tella, R.; MacCulloch, R. J.; and Oswald, A. J.. “Preferences over Inflation and Unemployment: Evidence from Surveys of Happiness.” American Economic Review, 91 (2001), 335–341.CrossRefGoogle Scholar
Dore, T., and Zarutskie, R.. “When Does Higher Firm Leverage Lead to Higher Employee Pay?” Review of Corporate Finance Studies, 12 (2023), 36–77.CrossRefGoogle ScholarPubMed
Ellul, A.; Wang, C.; and Zhang, K.. “Labor Unemployment Risk and CEO Incentive Compensation.” Management Science, 70 (2024), 885–906.CrossRefGoogle Scholar
Frank, M. Z., and Goyal, V. K.. “Testing the Pecking Order Theory of Capital Structure.” Journal of Financial Economics, 67 (2003), 217–248.CrossRefGoogle Scholar
Giroud, X., and Mueller, H. M.. “Firm Leverage, Consumer Demand, and Employment Losses during the Great Recession.” Quarterly Journal of Economics, 132 (2017), 271–316.CrossRefGoogle Scholar
Giroud, X., and Mueller, H. M.. “Firm Leverage and Regional Business Cycles.” Working Paper, Columbia University (2019).CrossRefGoogle Scholar
Gormley, T. A., and Matsa, D. A.. “Playing It Safe? Managerial Preferences, Risk, and Agency Conflicts.” Journal of Financial Economics, 122 (2016), 431–455.CrossRefGoogle Scholar
Graham, J. R.; Kim, H.; Li, S.; and Qiu, J.. “Employee Costs of Corporate Bankruptcy.” Journal of Finance, 78 (2023), 2087–2137.CrossRefGoogle Scholar
Graham, J. R., and Narasimhan, K.. “Corporate Survival and Managerial Experiences During the Great Depression.” Working Paper, Duke University (2004).Google Scholar
Green, T. C.; Huang, R.; Wen, Q.; and Zhou, D.. “Crowdsourced Employer Reviews and Stock Returns.” Journal of Financial Economics, 134 (2019), 236–251.CrossRefGoogle Scholar
Harford, J.; Klasa, S.; and Walcott, N.. “Do Firms Have Leverage Targets? Evidence from Acquisitions.” Journal of Financial Economics, 93 (2009), 1–14.CrossRefGoogle Scholar
Harford, J., and Li, K.. “Decoupling CEO Wealth and Firm Performance: The Case of Acquiring CEOs.” Journal of Finance, 62 (2007), 917–949.CrossRefGoogle Scholar
Harford, J.; Li, K.; and Zhao, X.. “Corporate Boards and the Leverage and Debt Maturity Choices.” International Journal of Corporate Governance, 1 (2008), 3–27.CrossRefGoogle Scholar
Hartzell, J. C.; Ofek, E.; and Yermack, D.. “What’s in It for Me? CEOs Whose Firms Are Acquired.” Review of Financial Studies, 17 (2004), 37–61.CrossRefGoogle Scholar
Haugen, R. A., and Senbet, L. W.. “The Insignificance of Bankruptcy Costs to the Theory of Optimal Capital Structure.” Journal of Finance, 33 (1978), 383–393.CrossRefGoogle Scholar
Heider, F., and Ljungqvist, A.. “As Certain as Debt and Taxes: Estimating the Tax Sensitivity of Leverage from State Tax Changes.” Journal of Financial Economics, 118 (2015), 684–712.CrossRefGoogle Scholar
Helliwell, J. F. “How’s Life? Combining Individual and National Variables to Explain Subjective Well-Being.” Economic Modelling, 20 (2003), 331–360.CrossRefGoogle Scholar
Hvide, H. K., and Panos, G. A.. “Risk Tolerance and Entrepreneurship.” Journal of Financial Economics, 111 (2014), 200–223.CrossRefGoogle Scholar
Kim, H. “How Does Labor Market Size Affect Firm Capital Structure? Evidence from Large Plant Openings.” Journal of Financial Economics, 138 (2020), 277–294.CrossRefGoogle Scholar
Layard, R. Happiness: Lessons from a New Science. New York, NY: Penguin Press (2005).Google Scholar
Leary, M. T., and Roberts, M. R.. “Do Firms Rebalance Their Capital Structures?” Journal of Finance, 60 (2005), 2575–2619.CrossRefGoogle Scholar
Lemmon, M. L.; Roberts, M. R.; and Zender, J. F.. “Back to the Beginning: Persistence and the Cross-Section of Corporate Capital Structure.” Journal of Finance, 63 (2008), 1575–1608.CrossRefGoogle Scholar
Lian, C., and Ma, Y.. “Anatomy of Corporate Borrowing Constraints.” Quarterly Journal of Economics, 136 (2021), 229–291.CrossRefGoogle Scholar
Lin, C.; Schmid, T.; and Xuan, Y.. “Employee Representation and Financial Leverage.” Journal of Financial Economics, 127 (2018), 303–324.CrossRefGoogle Scholar
Ljungqvist, A.; Zhang, L.; and Zuo, L.. “Sharing Risk with the Government: How Taxes Affect Corporate Risk Taking.” Journal of Accounting Research, 55 (2017), 669–707.CrossRefGoogle Scholar
Malmendier, U., and Tate, G.. “CEO Overconfidence and Corporate Investment.” Journal of Finance, 60 (2005), 2661–2700.CrossRefGoogle Scholar
Malmendier, U., and Tate, G.. “Who Makes Acquisitions? CEO Overconfidence and the Market’s Reaction.” Journal of Financial Economics, 89 (2008), 20–43.CrossRefGoogle Scholar
Malmendier, U.; Tate, G.; and Yan, J.. “Overconfidence and Early-Life Experiences: The Effect of Managerial Traits on Corporate Financial Policies.” Journal of Finance, 66 (2011), 1687–1733.CrossRefGoogle Scholar
Matsa, D. A. “Capital Structure as a Strategic Variable: Evidence from Collective Bargaining.” Journal of Finance, 65 (2010), 1197–1232.CrossRefGoogle Scholar
Matsa, D. A. “Capital Structure and the Firm’s Workforce.” Annual Review of Financial Economics, 10 (2018), 387–412.CrossRefGoogle Scholar
Michaels, R.; Page, T. Beau; and Whited, T. M.. “Labor and Capital Dynamics under Financing Frictions.” Review of Finance, 23 (2019), 279–323.CrossRefGoogle Scholar
Pan, Y.; Siegel, S.; and Wang, T. Y.. “The Cultural Origin of CEOs’ Attitudes toward Uncertainty: Evidence from Corporate Acquisitions.” Review of Financial Studies, 33 (2020), 2977–3030.CrossRefGoogle Scholar
Ouimet, P., and Tate, G.. “Firms with Benefits? Nonwage Compensation and Implications for Firms and Labor Markets.” Working Paper, University of North Carolina (2023).Google Scholar
Rajan, R. G., and Zingales, L.. “What Do We Know About Capital Structure? Some Evidence from International Data.” Journal of Finance, 50 (1995), 1421–1460.CrossRefGoogle Scholar
Rossin-Slater, M.; Ruhm, C. J.; and Waldfogel, J.. “The Effects of California’s Paid Family Leave Program on Mothers’ Leave-Taking and Subsequent Labor Market Outcomes.” Journal of Policy Analysis and Management, 32 (2013), 224–245.CrossRefGoogle ScholarPubMed
Schoar, A. “CEO Careers and Style.” Working Paper, Massachusetts Institute of Technology (2007).Google Scholar
Serfling, M. “Firing Costs and Capital Structure Decisions.” Journal of Finance, 71 (2015), 2239–2286.CrossRefGoogle Scholar
Simintzi, E.; Vig, V.; and Volpin, P.. “Labor Protection and Leverage.” Review of Financial Studies, 28 (2015), 561–591.CrossRefGoogle Scholar
Tate, G., and Yang, L.. “The Bright Side of Corporate Diversification: Evidence from Internal Labor Markets.” Review of Financial Studies, 28 (2015), 2203–2249.CrossRefGoogle ScholarPubMed
Tate, G., and Yang, L.. “The Human Factor in Acquisitions: Cross-Industry Labor Mobility and Corporate Diversification.” Review of Financial Studies, 37 (2024), 45–88.CrossRefGoogle Scholar
Titman, S. “The Effect of Capital Structure on a Firm’s Liquidation Decision.” Journal of Financial Economics, 13 (1984), 137–151.CrossRefGoogle Scholar
Titman, S., and Wessels, R.. “The Determinants of Capital Structure Choice.” Journal of Finance, 43 (1988), 1–19.CrossRefGoogle Scholar
Warner, J. “Bankruptcy Costs: Some Evidence.” Journal of Finance, 32 (1977), 337–347.CrossRefGoogle Scholar
Weller, C. E., and Wenger, J.. “Income Diversification as Insurance in an Increasingly Risky World: Identifying Policy Goals.” Inequality, Uncertainty, and Opportunity: The Varied and Growing Role of Finance in Labor Relations. Ithaca, NY: Cornell University Press (2015).Google Scholar
Xuan, Y. “Empire-Building or Bridge-Building? Evidence from New CEOs’ Internal Capital Allocation Decisions.” Review of Financial Studies, 22 (2009), 4919–4948.CrossRefGoogle Scholar