We examine whether a firm’s organization capital (OC) affects its labor investment efficiency. We find that a higher level of OC is related to lower deviations from the optimal level of labor investment according to economic conditions (higher labor investment efficiency). We find that this result is empirically robust to a stacked difference-in-differences approach using exogenous CEO turnover as a quasi-natural experiment and planned CEO retirements and forced CEO turnovers as placebo tests. We identify that the ability to retain talented employees and reduction of agency costs are the two channels by which OC improves a firm’s labor investment efficiency. Furthermore, we report that the positive effect of OC on labor investment efficiency is more pronounced in firms in highly competitive markets, firms with better access to external financing and firms with highly skilled labor.

We examine whether and to what extent business shocks explain the puzzling instabilities of corporate leverage. We find that business shocks explain a large portion of the unexplained leverage deviation, cross-sectional leverage position migration, and evaporating leverage similarities in the cross-section of firms. The cross-sectional distribution of corporate leverage is relatively persistent when there are fewer and smaller business shocks but becomes unstable for firms with larger business shocks. Our findings suggest that business shocks lead to discontinuities in the corporate value creation process and investment, thereby affecting corporate financing decisions. Put simply, the lumpiness of investment creates a “lumpy need for external financing. Our analysis implies that the empirical modeling of capital structure adjustment and, indeed, the modeling of other corporate policies, should be conditioned on business shocks.