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Human Capital, Bankruptcy, and Capital Structure
Author(s) -
BERK JONATHAN B.,
STANTON RICHARD,
ZECHNER JOSEF
Publication year - 2010
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.2010.01556.x
Subject(s) - capital structure , leverage (statistics) , debt , human capital , bankruptcy , explanatory power , economics , moral hazard , labour economics , physical capital , cost of capital , empirical evidence , monetary economics , microeconomics , finance , market economy , incentive , philosophy , epistemology , machine learning , computer science
We derive the optimal labor contract for a levered firm in an economy with perfectly competitive capital and labor markets. Employees become entrenched under this contract and so face large human costs of bankruptcy. The firm's optimal capital structure therefore depends on the trade‐off between these human costs and the tax benefits of debt. Optimal debt levels consistent with those observed in practice emerge without relying on frictions such as moral hazard or asymmetric information. Consistent with empirical evidence, persistent idiosyncratic differences in leverage across firms also result. In addition, wages should have explanatory power for firm leverage.