We examine the empirical relation between labor unions and firm indebtedness in the contemporary United States. Our identification strategy exploits two negative exogenous shocks in union power and the threat of unionization. Further, in the context of panel regressions, we develop a novel firm-level proxy for the bargaining power of labor using collective bargaining information from mandatory IRS filings from 1999 to 2013. Across a battery of tests, we document evidence in favor of a crowding-out hypothesis — namely, a substitution effect between labor power and financial leverage. Notably, this effect is more pronounced in firms in labor-intensive and unionized industries.

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 the effect of mandatory financial disclosures, specifically SFAS 131, on corporate restructuring activities by using difference-in-differences (DiD) and regression discontinuity design (RDD) settings. After the adoption of SFAS 131, firms are less likely to engage in acquisitions than are the control firms. Furthermore, conditional on firms' engagement in acquisition activities, acquirers are less likely to complete their initiated acquisition deals, especially for those value-destroying deals. After the implementation of SFAS 131, we find that the equity market reacts positively to large and diversifying deals that are subject to mandatory segment disclosures. Overall, our results suggest that the segment disclosure standard helped prevent managers from undertaking new, value-destroying M&As post-SFAS 131. Finally, these SFAS 131–induced corporate restructuring activities are shown to help reduce the risk of a stock price crash.

This paper extends our knowledge of corporate debt maturity structure by examining whether and to what extent overconfident CEOs affect maturity decisions. Consistent with a demand side story, we find that firms with overconfident CEOs tend to adopt a shorter debt maturity structure by using a higher proportion of short-term debt (due within 12months). This behavior of overconfident CEOs is not deterred by the high liquidity risk associated with such a financing strategy. Our demand side explanation remains robust even after considering six possible alternative drivers including a competing supply side explanation (in which creditors are reluctant to extend long-term debt to overconfident CEOs).

In this paper, we analyze the impact of leverage deviation (i.e., actual minus target optimal leverage) on the implied cost of equity capital. Our special focus is on whether (and to what extent) the sensitivity of the cost of equity to leverage deviation, influences the speed with which firms adjust their financial leverage toward the target. Confirming theoretical predictions, we find that the cost of equity is positively related to leverage deviation and that firms whose cost of equity is more sensitive to leverage deviation exhibit faster speed of adjustment toward the target. Collectively, our findings imply that capital structure targeting is not equally important to all firms. Indeed, we argue that while evidence of the trade-off theory will tend to be obscured in broad samples, it can hold strongly in meaningfully chosen sub-samples of firms — namely, those characterized by high sensitivity of equity cost to leverage deviation.

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.