Human Capital, Bankruptcy and Capital Structure / Jonathan B. Berk, Richard Stanton, Josef Zechner.

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Berk, Jonathan B

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Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w13014.Publication details: Cambridge, Mass. National Bureau of Economic Research 2007.Description: 1 online resource: illustrations (black and white)Subject(s):

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Abstract: We derive a firm's optimal capital structure and managerial compensation contract when employees are averse to bearing their own human capital risk, while equity holders can diversify this risk away. In the presence of corporate taxes, our model delivers optimal debt levels consistent with those observed in practice. It also makes a number of predictions for the cross-sectional distribution of firm leverage. Consistent with existing empirical evidence, it implies persistent idiosyncratic differences in leverage across firms. An important new empirical prediction of the model is that, ceteris paribus, firms with more leverage should pay higher wages.

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Previous	nber w13011 Creative Destruction and Firm-Specific Performance Heterogeneity /	nber w13012 Does the Minimum Wage Cause Inefficient Rationing? /	nber w13013 Is the US Population Behaving Healthier? /	nber w13014 Human Capital, Bankruptcy and Capital Structure /	nber w13015 International Differences in Lean Production, Productivity and Employee Attitudes /	nber w13016 The Productivity Argument for Investing in Young Children /	nber w13017 Micro and Macro Elasticities in a Life Cycle Model With Taxes /	Next

April 2007.

We derive a firm's optimal capital structure and managerial compensation contract when employees are averse to bearing their own human capital risk, while equity holders can diversify this risk away. In the presence of corporate taxes, our model delivers optimal debt levels consistent with those observed in practice. It also makes a number of predictions for the cross-sectional distribution of firm leverage. Consistent with existing empirical evidence, it implies persistent idiosyncratic differences in leverage across firms. An important new empirical prediction of the model is that, ceteris paribus, firms with more leverage should pay higher wages.