Local Labor Market Concentration and Capital Structure Decisions

Using the near universe of online job postings from 2007 to 2019, we construct a firm- level metric of local labor market concentration. We find that firms hiring in more concentrated labor markets tend to have higher financial leverage. The positive relation between labor market concentration and financial leverage is more pronounced when the firm hires low-skilled workers and workers from routine-intensive occupations. To establish causality, we exploit the establishment of Amazon HQ2 in Crystal City, Virginia as an exogenous shock to the local labor market concentration, and find results that are consistent with our baseline result. Valuation Insight The study finds that firms operating in areas with more concentrated labor markets take on relatively more debt. The likely reason is that such firms have more bargaining power concerning wages and are more profitable. Thus, given the trade-off theory (for instance), leverage increases. Firms who can choose their physical locations may create more value for stockholders by establishing in concentrated labor market locales.

Local Labor Market Concentration and Capital Structure Decisions Journal Articles