The Impact of Labour Unemployment on Corporate Debt Policy of Nigerian Quoted Firms

Abstract

An important gap exists in modern finance theory on the impact of labour market frictions on corporate debt policy. Unemployment risk is a considerable issue for workers but despite this, workers’ unemployment costs are largely absent from corporate financial theories which typically do not emphasize labour market frictions. This study investigates the interaction of labour unemployment risk on corporate borrowing in Nigeria. The population of study comprises all non-financial corporations quoted on the Nigerian Stock Exchange (NSE) for the period 1999-2014 out of which 50 companies that met the minimum data criteria were utilized. Using panel data least squares regression, the research documents the following findings. This study provides new evidence that financing decisions interact with non-financial stakeholders. Specifically, the results support the use of capital structure as a weak bargaining tool for companies but a possible bargaining variable for workers. Employee bargaining increases with leverage. In other words, highly levered firms exert pressure on themselves to treat employees decently. Unemployment exerts downward pressure on corporate borrowing. Thus, unemployment risk provides a partial explanation for the conservative financial policies of Nigerian quoted firms thereby partly accounting for the low leverage puzzle for some firms. Given significant unemployment problem in Nigeria, compounded by weak social safety net for workers, the study recommends promotion of corporate policies that strengthen conservative debt usage in industries where human capital risk is concentrated.