Essays on Human Capital and Financial Markets

Abstract

This dissertation examines various aspects of human capital and their linkage to the financial markets. The first chapter empirically shows that the cost of debt is systematically higher for firms that operate in mobile labor markets. We posit two channels through which labor mobility could positively affect firms’ cost of debt. First, relates to greater default risk arising from potential loss of key personnel and a corresponding reduction in future cash flows, while the second relates to lower liquidation value (collateral) given that the firms’ human capital is more transient, which reduces pledgeable assets. Using across state, cross-sectional variations in the degree of enforceability of non-compete agreements which restrict employee mobility as a proxy for anticipated labor mobility, and state-level reforms to non-compete laws to capture exogenous shocks to labor mobility, we find that labor mobility (inverse of the strength of non-compete enforceability) has a significantly positive effect on the credit spreads of public corporate bonds (our measure of the cost of debt) issued from 1990 – 2014 for large, U.S. industrial firms. Moreover, the analysis reveals that the effect of labor mobility is greater for firms that are located in states which have a higher concentration of industry rivals or for firms that are comprised primarily of professional, knowledge workers, which corroborates the main results. Overall, these findings suggest that creditors price financial contracts by taking into account the risk that arises from labor mobility. The second chapter examines the effect of shareholder monitoring on the relation between human capital and firm value. The extant literature suggests that influential, concentrated ownership facilitates close shareholder monitoring and reduces information asymmetries between shareholders and the firm (Demsetz, 1985; Anderson and Reeb, 2003). Yet, intense monitoring by shareholders can impede employees’ initiatives and effort (Shleifer and Vishny, 1988; Burkart, Gromb, and Panunzi, 1997). We argue that such a cost can be significant when firm output relies on specialized – rather than more generic – human capital, which require self-motivation and autonomy to be productive. Consistent with our argument, the empirical evidence indicates that firm value suffers in the presence of highly influential ownership, but only when firm productivity depends on specialized human capital. We do not find such an effect when human capital is more generalized. Specifically, we observe that an equity portfolio that is long on firms with influential ownership and short on firms without influential ownership earns a significantly negative abnormal return from 2002 to 2010, but again, only for firms with specialized human capital. Overall, our results delineate the importance of considering the linkages between human capital and financial markets, which could impact the allocation of capital in the economy, and moreover, on economic growth.