Labor unemployment risk and corporate financing decisions

Ashwini K. Agrawal, David A. Matsa*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

107 Scopus citations


This paper presents evidence that firms choose conservative financial policies partly to mitigate workers' exposure to unemployment risk. We exploit changes in state unemployment insurance laws as a source of variation in the costs borne by workers during layoff spells. We find that higher unemployment benefits lead to increased corporate leverage, particularly for labor-intensive and financially constrained firms. We estimate the ex ante, indirect costs of financial distress due to unemployment risk to be about 60 basis points of firm value for a typical BBB-rated firm. The findings suggest that labor market frictions have a significant impact on corporate financing decisions.

Original languageEnglish (US)
Pages (from-to)449-470
Number of pages22
JournalJournal of Financial Economics
Issue number2
StatePublished - May 1 2013


  • Capital structure
  • Compensating wage differentials
  • Financial distress
  • Unemployment risk

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics
  • Strategy and Management

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