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How Does Labor Market Size Affect Firm Capital Structure? Evidence from Large Plant Openings

November 2015

Written by: Hyunseob Kim

Working Paper Number:

CES-15-38

Abstract

I examine how the labor market in which firms operate affects their capital structure decisions. Using the US Census Bureau data, I exploit a large plant opening as an abrupt increase in the size of a local labor market. I find that a new plant opening leads to a 2.6% to 3.9% increase in the debt-to-capital ratio of existing firms in the 'winner' county relative to the 'runner-up' choice. This result is consistent with larger labor markets making a job loss less costly, which in turn reduces indirect costs of financial distress. Moreover, this spillover effect is larger for firms 1) that have a larger fraction of employees in the affected county, 2) that employ the same type of workers as the new plant, and 3) that have larger unexploited benefits of debt.

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:
endogeneity, employ, finance, firms plants, labor, leverage, endogenous, capital, bankruptcy, economically, spillover, workforce, debt, econometrician, layoff, labor markets, rent

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:
Metropolitan Statistical Area, Census of Manufactures, Annual Survey of Manufactures, Standard Statistical Establishment List, Standard Industrial Classification, National Science Foundation, Total Factor Productivity, Bureau of Economic Analysis, Longitudinal Business Database, Census of Manufacturing Firms, Cornell University, National Institute on Aging, Alfred P Sloan Foundation, Longitudinal Employer Household Dynamics, Duke University, International Trade Research Report

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