Three Essays on Corporate Finance and Labor

Abstract

My dissertation investigates the interaction between corporate finance and labor market. It contains three chapters. Chapter 1 studies the strategic role of debt structure in improving the bargaining position of a firm's management relative to its non-financial stakeholders. Debt structure is essential for strategic bargaining because it affects the ease of renegotiating debt contracts and thus the credibility of bankruptcy threats. Debt structure is shown to be adjusted as a response to an increase in non-financial stakeholders' negotiation power. Using NLRB labor union election as a laboratory setting and employing a regression discontinuity design, we find that passing a labor union election leads to an increase in the ratio of public debt to total assets and a decrease in the ratio of bank debt to total assets in the following three years after elections, whereas there is no significant change in the level of total debt. The syndication size of newly issued bank loans increases while creditor ownership concentration decreases once the vote share for unions passes the winning threshold. Further analyses confirm that the debt structure adjustments after union certification are more likely driven by the strategic concerns of management rather than more constrained access to bank loans. Finally, we also show that the degree of wage concessions is strongly related to a firm's debt structure using the airline industry as an empirical setting. Chapter 2 is co-authored with Tracy Yue Wang. In this study, we measure firms' exposures to skilled labor risk by the intensity of such discussions in their 10-Ks. We find that this measure effectively captures firm risk due to the mobility of skilled labor. We then examine the impact of skilled labor risk on firms' compensation policies. To overcome the reverse causality potentially present in the equilibrium relation between skilled labor risk and compensation policies, we use housing market factors that affect home owners' mobility as instruments for local firms' skilled labor risk, based on the insight that talents are likely homeowners. Consistent with theories on optimal compensation design in the presence of mobile talents, our results suggest that firms facing higher skilled labor risk use substantially more incentive pay for both top executives and employees below the top rank. Those firms also ex ante offer a higher level of pay to skilled labor. Finally, we find that firms facing higher skilled labor risk invest more in strengthening employee relations, but such investment tend to be concentrated in compensation and benefits related dimensions. Overall, our study suggests that the mobility of skilled labor is an important determinant of corporate compensation policies, affecting the split of surplus between firms' owners and employees. Chapter 3 studies the effect of labor adjustment costs on corporate risk management. Labor adjustment costs attenuate the correlation between a firm's internal fund and its investment opportunities and create more incentives for the firm to smooth cash flows. We find that firms in which employees are more protected by labor market institutions use more derivative contracts for risk management. We further find that firms that rely more on skilled labor engage in more derivative hedging since labor with higher skill is associated with larger adjustment costs. Such an effect is attenuated when the mobility of skilled labor is restricted.