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Capital Structure and Employment Flexibility
Capital Structure and Employment Flexibility
Capital Structure and Employment Flexibility
Capital Structure and Employment Flexibility
Capital Structure and Employment Flexibility
Capital Structure and Employment Flexibility
Capital Structure and Employment Flexibility
Capital Structure and Employment Flexibility
Capital Structure and Employment Flexibility
Capital Structure and Employment Flexibility
Capital Structure and Employment Flexibility
Capital Structure and Employment Flexibility
Capital Structure and Employment Flexibility
Capital Structure and Employment Flexibility
Capital Structure and Employment Flexibility
Capital Structure and Employment Flexibility
Capital Structure and Employment Flexibility
Capital Structure and Employment Flexibility
Capital Structure and Employment Flexibility
Capital Structure and Employment Flexibility
Capital Structure and Employment Flexibility
Capital Structure and Employment Flexibility
Capital Structure and Employment Flexibility
Capital Structure and Employment Flexibility
Capital Structure and Employment Flexibility
Capital Structure and Employment Flexibility
Capital Structure and Employment Flexibility
Capital Structure and Employment Flexibility
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Capital Structure and Employment Flexibility

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NES 20th Anniversary Conference, Dec 13-16, 2012 …

NES 20th Anniversary Conference, Dec 13-16, 2012
Capital Structure and Employment Flexibility (based on the article presented by Olga Kuzmina at the NES 20th Anniversary Conference).
Author: Olga Kuzmina, NES

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  • 1. Introduction Data and Empirical Strategy Main Results Mechanisms and DiscussionCapital Structure and Employment Flexibility Olga Kuzmina New Economic School The NES 20th Anniversary Conference December 14th, 2012 Olga Kuzmina Capital Structure and Employment Flexibility
  • 2. Introduction Data and Empirical Strategy Main Results Mechanisms and DiscussionIntroduction The motivation behind many labor policies in Europe is usually to promote employment and job security for workers. However, it is important to understand how such policies can affect firms, directly or indirectly. Typical result in the unionization literature: more job protection for workers → worse firm outcomes In this paper I explore how financing decisions of firms are affected by the use of more flexible employment practices. Simple and compelling channel Causal evidence Unrelated to unionization and bargaining Olga Kuzmina Capital Structure and Employment Flexibility
  • 3. Introduction Data and Empirical Strategy Main Results Mechanisms and DiscussionIntroduction A more general framework: how a firm’s composition of contractual arrangements with its factors of production affects its capital structure. In an uncertain environment such flexible arrangements can allow firms to adjust their input costs and profits upon realization of shocks Effectively convert fixed operating costs into variable costs Reduced operating leverage promotes financial leverage Using a unique panel dataset and employing the exogenous variation in government labor policies I establish a causal link between the firm’s use of flexible employment contracts and its capital structure. Olga Kuzmina Capital Structure and Employment Flexibility
  • 4. Introduction Data and Empirical Strategy Main Results Mechanisms and DiscussionMechanism When firms employ temporary workers, they can adjust production/labor costs/profits upon shock realization Temporary workers absorb a higher share of the volatility of output (Spain: Alonso-Borrego et al., 2004; France: Blanchard and Landier, 2002; Italy: Kugler and Pica, 2004) Flexible employment makes firms ”less risky” The fixed component of costs is lower, operating leverage falls The incidence of bankruptcy for a given level of debt falls The firm can issue and service a higher level of debt Reduction in operating leverage promotes financial leverage (Mandelker and Rhee, 1984) Real flexibility enhances debt capacity (Mauer and Triantis, 1994) Olga Kuzmina Capital Structure and Employment Flexibility
  • 5. Introduction Data and Empirical Strategy Main Results Mechanisms and DiscussionThe Other Side Real decisions and flexibility can affect bankruptcy costs and debt capacity But financing policies themselves can induce different labor outcomes/behavior: Capital structure as a way to induce investment in firm-specific human capital (Butt Jaggia, Thakor, 1994; Berk, Stanton, Zechner, 2010) Capital structure as a bargaining tool (Perotti, Spier, 1993; Matsa, 2010; Simintzi, Vig, Volpin, 2010) → Finding a correlation between (employment) flexibility and capital structure does not reveal the direction of causality Olga Kuzmina Capital Structure and Employment Flexibility
  • 6. Introduction Data and Empirical Strategy Main Results Mechanisms and DiscussionContribution of the Paper Provide a causal evidence of flexible employment affecting capital structure Use a simple measure of employment flexibility observed at the firm level do not rely on calibration or estimation (e.g. from industry) do not rely on reduced-form employment laws Illustrate the exact mechanism behind this causal effect being the substitution between operating and financial leverage Argue for the effect not being about unionization and bargaining Olga Kuzmina Capital Structure and Employment Flexibility
  • 7. Introduction Data and Empirical Strategy Main Results Mechanisms and DiscussionRelated Empirical Literature MacKay, 2003: Mixed empirical results across calibrated measures of real flexibilities (potentially due to risk-shifting) Hanka, 1998: Empirically more debt is correlated with heavier reductions in employment and relying more on part-time/seasonal labor Petersen, 1994: Flexible defined contribution pension plan (vs non-flexible defined benefit) is correlated with less variable cash flow Olga Kuzmina Capital Structure and Employment Flexibility
  • 8. Introduction Data and Empirical Strategy Main Results Mechanisms and DiscussionEmpirical Strategy Dit = αrt + βTempit−1 + Xit−2 γ + ηi + it Controls for any firm-specific time-invariant characteristics, e.g.: overall more or less variable cash flow small business with a distrust in credit and banking tasks overall require more/less human capital specificity general nature of assets Region-year fixed effects control for: differential access to credit over time in different locations macroeconomic effects driving the cost of financing unemployment rates and cross-regional trends in worker migration Standard errors are clustered at the firm and region-year level in all the analysis. Olga Kuzmina Capital Structure and Employment Flexibility
  • 9. Introduction Data and Empirical Strategy Main Results Mechanisms and DiscussionNeed for Exogenous Shock: why Cov (Temp, ) = 0 Unobserved invesment opportunity set and potential for ex post project substitution Firms hire at more flexible terms ex ante → Temp ↑ Lenders rationally expect project substitution → D ↓ Firm’s financial constraints (Caggese and Cu˜at, 2008) n Vulnerable to liquidity shocks, ”demand for flexibility” → Temp ↑ Can’t get lending → D ↓ Desire to stimulate human capital investment (Butt Jaggia and Thakor, 1994, and Berk, Stanton and Zechner, 2010) Offer longer-term contracts → Temp ↓ Pre-commit to less debt → D ↓ Olga Kuzmina Capital Structure and Employment Flexibility
  • 10. Introduction Data and Empirical Strategy Main Results Mechanisms and DiscussionWhy Spain? Dual labor market: 1/3 of all employees are on T contracts. Big difference in firing costs across contract types: 0-12 days per year of tenure for T 33-45 days per year of tenure (+ court fees) for P Survey of manufacturing firms, ESEE, 1994-2006: can directly measure flexible contracts (T) at firm level. Quasi-experiment: government subsidies implemented differentially by region, year, and worker characteristics. Effectively ”control” for collective bargaining as it is not at the firm level. Olga Kuzmina Capital Structure and Employment Flexibility
  • 11. Introduction Data and Empirical Strategy Main Results Mechanisms and DiscussionMaximum Subsidies across Regions Olga Kuzmina Capital Structure and Employment Flexibility
  • 12. Introduction Data and Empirical Strategy Main Results Mechanisms and DiscussionGraphical Evidence: by Year Olga Kuzmina Capital Structure and Employment Flexibility
  • 13. Introduction Data and Empirical Strategy Main Results Mechanisms and DiscussionGraphical Evidence: by Industry Olga Kuzmina Capital Structure and Employment Flexibility
  • 14. Introduction Data and Empirical Strategy Main Results Mechanisms and DiscussionInstrumental Variable: ExampleA firm in Baleares in ”OTE” industry vs a firm in ”Apparel” in 2000: Subsidygrt is 1653 Euro for female, 0 for male EPA: 0.05 of all workers in OTE industry are females; EPA: 0.75 of all workers in Apparel industry are females; Assume each firm originally has 22% of Temps. OTE firm is eligible to receive (per employee): 0.22 ∗ (0.05 ∗ 1653 + 0.95 ∗ 0) = 0.22 ∗ 83 = 18 Euro Apparel firm is eligible to receive (per employee): 0.22 ∗ (0.75 ∗ 1653 + 0.25 ∗ 0) = 0.22 ∗ 1240 = 273 Euro Olga Kuzmina Capital Structure and Employment Flexibility
  • 15. Introduction Data and Empirical Strategy Main Results Mechanisms and DiscussionInstrumental Variable: ExampleA firm in Baleares in ”OTE” industry vs a firm in ”Apparel” in 2000: Subsidygrt is 1653 Euro for female, 0 for male EPA: 0.05 of all workers in OTE industry are females; EPA: 0.75 of all workers in Apparel industry are females; Assume each firm originally has 22% of Temps. OTE firm is eligible to receive (per employee): 0.22 ∗ (0.05 ∗ 1653 + 0.95 ∗ 0) = 0.22 ∗ 83 = 18 Euro Apparel firm is eligible to receive (per employee): 0.22 ∗ (0.75 ∗ 1653 + 0.25 ∗ 0) = 0.22 ∗ 1240 = 273 Euro .. Another Apparel firm with 44% of Temps: 0.44 ∗ (0.75 ∗ 1653 + 0.25 ∗ 0) = 0.44 ∗ 1240 = 546 Euro Olga Kuzmina Capital Structure and Employment Flexibility
  • 16. Introduction Data and Empirical Strategy Main Results Mechanisms and DiscussionInstrumental Variable Subsidyit = g wiT 0 wsg Subsidygrt 0 Calculates the expected total real Euro value of subsidies a firm would receive if it converted all of its temporary workers into permanent ones, per employee. Difference-in-differences analogy: Compare across firms that have high and low eligibility Cross-sectional variation captured by firm fixed effects Region-year fixed effects capture government choice of subsidy amounts (e.g. relative sizes of regional budgets) Can intepret in ”intention-to-treat” framework Actual subsidies cannot be used (endogenous participation) Identification assumption: remaining variation is orthogonal to firm-specific shocks Olga Kuzmina Capital Structure and Employment Flexibility
  • 17. Introduction Data and Empirical Strategy Main Results Mechanisms and DiscussionSummary Statistics Variable Mean Std N Total Assets 57.7mln 255mln 18365 Total Debt / Total Assets 0.571 0.230 18365 Total Employment 269 783 18365 Lagged Temp 0.174 0.210 18365 Temp0 0.237 0.250 18364 Maximum Subsidy per T Worker 3523 4011 17488 Maximum Subsidy per Employee 816 1538 17488 Size 16.013 2.014 18347 Profitability 0.225 0.134 18346 R&D 0.007 0.017 18246 Olga Kuzmina Capital Structure and Employment Flexibility
  • 18. Introduction Data and Empirical Strategy Main Results Mechanisms and Discussion Main Results Total Debt / Total Assets OLS IV-2SLS 1st Stage 2nd Stage 1st Stage 2nd StageLagged T 0.0597*** 0.0519*** 0.149** 0.168** (0.0118) (0.0132) (0.0582) (0.0766)Lagged2 -0.0377*** -0.0269***Subsidy (0.00589) (0.00513)N of firms 2244 2029 2226 2226 2013 2013Observations 17679 15091 16889 16889 14348 14348Within R 2 0.027 0.032 0.150 0.128F-statistic 41.06 27.56Firm controls Y Y YFirm FE Y Y Y Y Y YReg-year FE Y Y Y Y Y Y Olga Kuzmina Capital Structure and Employment Flexibility
  • 19. Introduction Data and Empirical Strategy Main Results Mechanisms and DiscussionRobustness: Additional Controls Total Debt / Total Assets IV-2SLS Add Tangibility Add Average Wages Lagged T 0.160* 0.168** (0.0819) (0.0766) Lagged2 -0.0261*** -0.0269*** Subsidy (0.00511) (0.00513) N of firms 1977 1977 2013 2013 Observations 13964 13964 14348 14348 Within R 2 0.128 0.128 F-statistic 26.00 27.56 Firm controls Y Y Y Y Firm FE Y Y Y Y Region-year FE Y Y Y Y Olga Kuzmina Capital Structure and Employment Flexibility
  • 20. Introduction Data and Empirical Strategy Main Results Mechanisms and DiscussionRobustness: Tighter Identification Total Debt / Total Assets IV-2SLS Add Region-Industry-Year FEs Lagged T 0.141** 0.169* (0.0648) (0.0887) Lagged2 -0.0375*** -0.0262*** Subsidy (0.00684) (0.00608) N of firms 2226 2226 2013 2013 Observations 16889 16889 14348 14348 Within R 2 0.311 0.297 F-statistic 30.17 18.61 Firm controls Y Y Firm FE Y Y Y Y Reg-ind-year FE Y Y Y Y Olga Kuzmina Capital Structure and Employment Flexibility
  • 21. Introduction Data and Empirical Strategy Main Results Mechanisms and DiscussionRobustness: Originally-Sampled Firms Total Debt / Total Assets IV-2SLS Subsample Firms that enter in 1994 Lagged T 0.188** 0.229** (0.0788) (0.100) Lagged2 -0.0408*** -0.0298*** Subsidy (0.00634) (0.00541) N of firms 1549 1549 1417 1417 Observations 12843 12843 11061 11061 Within R 2 0.151 0.133 F-statistic 41.45 30.36 Firm controls Y Y Firm FE Y Y Y Y Region-year FE Y Y Y Y Olga Kuzmina Capital Structure and Employment Flexibility
  • 22. Introduction Data and Empirical Strategy Main Results Mechanisms and DiscussionIdentifying the Mechanism If temporary workers indeed reduce probability of bankruptcy, then the option to fire them is most valuable for firms with high levels of bankruptcy costs. For a given change in the proportion of temporary workers, the change in expected bankruptcy costs is higher for such firms. The empirical relationship between capital structure and employment flexibility should thus be stronger for these firms. Want to compare firms with high and low levels of bankruptcy costs Proxy with a low/high liquidation value of assets (whether the firm has less/more land and buildings that industry peers) Idea: these assets are more easily redeployable and do not lose value under new owners (Williamson, 1988, and Shleifer and Vishny, 1992) Olga Kuzmina Capital Structure and Employment Flexibility
  • 23. Introduction Data and Empirical Strategy Main Results Mechanisms and DiscussionBankruptcy Costs Analysis Total Debt / Total Assets High * Lagged T 0.295** 0.378** (0.119) (0.168) Low * Lagged T 0.0717 0.0664 (0.0648) (0.0851) High * Lagged2 -0.0287*** -0.0193*** Subsidy (0.00601) (0.00542) Low * Lagged2 -0.0404*** -0.0312*** Subsidy (0.00601) (0.00544) N of firms 2074 2074 1882 1882 Observations 15858 15858 13484 13484 F-statistic 12.27 7.07 Firm controls Y Y Firm FE Y Y Y Y Region-year FE Y Y Y Y Implied Difference -0.223* -0.312* p-value 0.081 0.081 Olga Kuzmina Capital Structure and Employment Flexibility
  • 24. Introduction Data and Empirical Strategy Main Results Mechanisms and DiscussionEx Post Bargaining? Workers’ bargaining power ↑ Precommit to high debt → Debt ↑ [Matsa (2010) on USA state unionization laws] Renegotiable debt → Debt ↓ [Simintzi, Vig, Volpin (2011) on European EPL indicators] Bargaining is not an omitted variable: Less flexible labor is chosen for exogenous incentives, rather than in attempt to reduce employees’ bargaining power Bargaining is not a likely channel: 85% of collective bargaining in Spanish manufacturing is NOT at the firm level (especially for smaller firms), but rather industry-regional or higher. These agreements apply to all firms equally irrespective of whether they participated in the actual bargaining process and firms cannot discriminate based on the contract type. Olga Kuzmina Capital Structure and Employment Flexibility
  • 25. Introduction Data and Empirical Strategy Main Results Mechanisms and DiscussionThe Role of Cash Subsidy is a cash inflow to firms: Concern if this cash were used to pay out existing debt (effect overestimated). Stronger results if used to raise more debt (effect underestimated). The ideal if both cash balance and received subsidies were observed: Show that for cash-abundant firms the effect is there Compare changes in Debt to actual subsidies received Note: using (Debt-Cash)/Assets as the dependent variable would not suffice ESEE does not provide either, so: Use proxies for cash abundancy and show the effect is there Use a back-of-the-envelope calculation of received subsidies Olga Kuzmina Capital Structure and Employment Flexibility
  • 26. Introduction Data and Empirical Strategy Main Results Mechanisms and Discussion Subsamples of Cash-Abundant FirmsCF = (Sales − COGS − OtherCosts)(1 − τ ) − CapitalExpenditures + AssetSales CF CFt−2 +CFt−1 +CFt Subsample CFt−2 CFt TotalAssets t−2 TotalAssetst−2 >Ind Median >Ind Median >Ind Median >Ind Median Total Debt / Total Assets Lagged T 0.220** 0.191* 0.206** 0.258** (0.0903) (0.115) (0.102) (0.123) Number of firms 1432 1433 1488 1370 Observations 7142 7075 6883 6838 1st stage F-statistic 29.74 37.69 20.21 19.92 Firm controls Y Y Y Y Firm FE Y Y Y Y Region-year FE Y Y Y Y Olga Kuzmina Capital Structure and Employment Flexibility
  • 27. Introduction Data and Empirical Strategy Main Results Mechanisms and DiscussionBack-of-the-Envelope Calculation Average change in proportion of Temp is -0.00869 (i.e. 0.87 pp per year) *Av. Employment = Average Number of Contract Conversions = 0.00869*268.7378= 2.34 (per year) *Av. Subsidy Per Contract = Average Received Subsidy = 2.34*3523= 8227 (per year) * 0.149 = Average Change in Debt / Total Assets implied by the results = -0.00869*0.149 = -0.0013 (i.e. 0.13 pp per year) *Av. Total Assets = Average Change in Debt = −0.0013 ∗ 5.77 ∗ 107 = 74766 (per year) About 11% of the effect may be due to cash considerations Robust to calculating by region Olga Kuzmina Capital Structure and Employment Flexibility
  • 28. Introduction Data and Empirical Strategy Main Results Mechanisms and DiscussionConclusion Firms that hire more temporary workers take more debt, controlling for time-invariant characteristics, debt-related covariates, and non-parametric region-industry trends. Differential regional subsidies provide an exogenous shock to firms’ employment practices and enable to estimate the causal effect of the use of more flexible employment contracts on capital structure. This causal effect is large: prohibiting an average firm from hiring temporary workers would make it reduce its debt level by 3.6 pp (6.3% of the average). The results are interpreted in the framework of substitution between operating and financial leverage. Olga Kuzmina Capital Structure and Employment Flexibility

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