Industrial Robots and Finance

Abstract

We examine theoretically and empirically the effects of industrial robot adoption on corporate financing. Industrial robots are distinct from other types of physical capital in that they tend to be a substitute for labor. As a result, robots provide a hedge against fluctuations in labor costs. Our model shows that industrial robot adoption reduces a firm's risk and equilibrium interest rate, and increases optimal leverage. We test these predictions using firm-level panel data on robot deployment in five Chinese provinces across multiple industries. Consistent with the role of robots in hedging labor cost risk, robot adoption leads to higher leverage and lower cost of debt, at both extensive and intensive margins. The heterogeneity and staggered nature of robot-friendly policies across both provinces and industries enables making causal claims. The model's more refined predictions, concerning the effects of labor contribution, robot-labor substitution, and robot adjustment costs on the strength of the relation between robot adoption and corporate financing, are also borne out in the data.