Employee Flight Risk and Capital Structure Decisions

Abstract

I show that employee flight risk, a firm’s risk of experiencing significant employee departures and incurring large costs due to productivity losses, and costs related to searching for, hiring, and training new employees impacts its capital structure decisions. I proxy for these costs with the cross-industry labor mobility of a firm’s workers using a novel dynamic textual measure for this mobility based on network centrality. When firms face a higher risk of employee departures to firms in other industries, they maintain a lower debt ratio, hold more cash, and pay less dividends. The effect of cross-industry labor mobility on firms’ capital structure is stronger for firms with more workers who are skilled or in managerial occupations, firms in labor-intensive industries, firms with greater hiring costs, financially constrained firms, and when workers have lower switching costs. Conversely, the effect of cross-industry labor mobility on firms’ capital structure is weaker for firms in industries with higher relative performance and valuations. To infer causality, I make use of several different exogenous shocks to employee departure and job switching costs. Overall, my findings imply that firms choose more conservative financial policies when they face higher employee flight risk.