International College of Economics and Finance

Research seminar by Martin Schmalz (Princeton University): «Managing Human Capital Risk»

On Friday, February 17 at 4.40 pm International College of Economics and Finance and International Laboratory of Financial Economics held Research seminar.
Speaker: Martin Schmalz (Princeton University)
Theme: «Managing Human Capital Risk»
Venue: Pokrovski Bulvar, 11, Room Zh-822

Abstact: Labor adjustment costs make it optimal to retain hard-to-replace employees in bad times, and thus cause an “implicit liability" to pay their wages. The employees' human capital thus behaves like an illiquid asset of the firm that is financed with fixed coupon payments. Firms optimally hold equity-financed cash to insure against the risk of being unable to follow the optimal labor retention policy.
I distinguish my model from existing models of the interaction between corporate finance and labor by identifying the corporate finance response to unionization with a regression discontinuity design. Increased labor adjustment costs due to unionization cause higher cash-to-asset ratios and lower net leverage in financially unconstrained firms. Firms that cannot raise cash “save on risk management," decrease cash-to-assets and increase net leverage.

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