1. Debt Structure as a Strategic Bargaining Tool (Job Market Paper) [SSRN]
Abstract: This paper 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. Using the airline industry as an empirical setting, we first show that the degree of wage concessions is strongly related to a firm’s debt structure. Debt structure is further 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.
*This paper was presented at the 2017 WFA (Scheduled), the 2017 SFS Cavalcade (Scheduled), the 2017 Midwest Finance Association (MFA) Annual Conference, the Washington University 13th Annual Corporate Finance Ph.D. Poster Session (Best Finance Ph.D. Award), the 2016 CSEF-EIEF-SITE Conference on Finance and Labor, and University of Minnesota.
2. Labor Adjustment Costs and Risk Management [SSRN]
Abstract: This paper 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 therefore create more incentives for the firm to increase the ability of cash flow smoothing. 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 levels is associated with larger adjustment costs. Such an effect is attenuated when the mobility of skilled labor is restricted.
*Revise and resubmit, Journal of Financial and Quantitative Analysis (JFQA)
*This paper was presented at the 2017 Midwest Finance Association (MFA) Annual Conference and University of Minnesota
Abstract: This paper provides new evidence on the effect of unionization on the cost of bank loans. By using a regression discontinuity design, we establish a causal relation from new unionization to bank loan pricing. Relative to firms in which unions barely lose elections, firms in which unions barely win elections experience an increase in the spread of the newly originated loans. Further tests suggest that the effect of labor unions on loan spread is through reducing recovery rate of banks in bankruptcy rather than increasing firms’ default risk.
*This paper was presented at the 2016 Financial Intermediation Research Society (FIRS) Conference, the 2016 Midwest Finance Association (MFA) Annual Conference, the 2015 Financial Management Association (FMA) Annual Meeting, the 2015 Tsinghua Finance Workshop, the 2014 Eastern Finance Association (EFA) Annual Meeting, and University of Minnesota
Abstract: Many U.S. publicly traded companies discuss potential failure in attracting and retaining skilled labor as a risk factor in their 10-K filings. 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 more incentive pay for both top executives and employees below the top rank. Skilled labor risk has a larger effect on compensation structure than on compensation level. The effect is also larger for employees below the top rank than for top executives, suggesting that our measure is more about the mobility of skilled labor in general than that of top executives. 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. Our results also suggest that these compensation policies help to mitigate skilled labor risk.
*This paper was presented at the 2017 WFA (Scheduled), the 2017 Financial Intermediation Research Society (FIRS) Conference (Scheduled), Tulane University, University of Miami, and University of Minnesota