Abstract
We examine the effect of capital structure on managers’ labor cost management by focusing on the relations between leverage and hiring decisions. Consistent with the disciplining effect of debt, we find that firms with higher leverage hire fewer employees. We also find that leverage is negatively associated with total labor cost, which is the product of the number of employees and average employee wage, and that this effect is greater for firms with higher bankruptcy risk. Overall, our results provide evidence that the disciplining effect of debt on employee hiring outweighs the effect of debt on compensating wage documented in prior studies.
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