The Employee Clientele of Corporate Leverage : Evidence from Personal Labor Income Diversification
Using employee job-level data, we empirically test the equilibrium matching between a firm’s debt usage and its employee job risk aversion (“clientele effect”), as predicted by the existing theories. We measure job risk aversion for a firm’s employees using their labor income concentration in the firm, calculated as the fraction of the employees’ total personal labor income or total household labor income that is accounted for by their income from this particular firm. Using a sample of about 1,400 U.S. public firms from 1990-2008, we find a robust negative relation between leverage and employee job risk aversion, which is consistent with the clientele effect. Specifically, when a firm’s existing employees have higher labor income concentration in it, the firm tends to have lower leverage, and this association is more pronounced for firms with higher labor intensity and those in financial distress. Our results are robust to the inclusion of firm fixed effects and managerial risk attitudes and continue to hold when we only examine full-time workers or consider the industry correlation of the multiple jobs. For identification, we make use of the quasi-natural experiment of California Paid Family Leave Legislation (CA-PFL) and adopt a difference-in-differences analysis. Finally, in terms of new hires, we find that firms with lower leverage are more likely to recruit employees with less alternative labor income.