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The Employee Clientele of Corporate Leverage: Evidence from Family Labor Income Diversification

Jie He,Xiao (Shaun) Ren,Tao Shu,Huan Yang

Published 2025 in Journal of Financial and Quantitative Analysis

ABSTRACT

We study the equilibrium matching between capital structure and employee job risk aversion (the “clientele effect”) by examining individual workers’ family labor income diversification. Consistent with theories, we find a robust, positive relation between a firm’s debt usage and its employees’ family labor income diversification. This relation is stronger for firms with higher labor intensity and those in financial distress. For identification, we exploit the quasi-natural experiment of California Paid Family Leave Legislation, which exogenously increases employees’ family income diversification. Further, we find that higher-leverage firms recruit new employees with greater labor income diversification. * We thank Renee Adams, Ashiwini Agrawal, Anup Agrawal, Heitor Almeida, Ilona Babenko, Melissa Banzhaf, Jonathan Berk, Philip Bond, Stephen Dimmock, Espen Eckbo, Andrew Ellul, Stu Gillan, Michael Hertzel, Sara Holland, Julie Hotchkiss, Feng Jiang, Han Kim, Hyunseob Kim, Anzhela Knyazeva, Jongsub Lee, Ugur Lel, Inessa Liskovich, Ping Liu, David Matsa, Jeffry Netter, Luigi Pistaferri, Daniel Rattl, David Robinson, Amit Seru, Tao Shen, Sheridan Titman, Toni Whited, Wei Xiong, Sheng-Jun Xu, Liu Yang, and participants at the 2019 European Finance Association Meetings, the 2019 Northern Finance Association Meetings, the 2019 China International Conference in Finance, the 2019 Finance Down Under Conference, 2017 Stanford Institute for Theoretical Economics Conference on Labor and Finance, the 2017 Conference of Financial Economics and Accounting, the 2017 SFS Finance Cavalcade Asia-Pacific, the 2017 Oslo Summer Workshop on Corporate Finance, the 2017 Financial Management Association Meetings, the 2017 Atlanta RDC Research Conference, and seminar participants at the University of Georgia, CUHK-Shenzhen, Chinese University of Hong Kong, and Iowa State University for valuable comments. Any opinions and conclusions expressed herein are those of the authors and do not necessarily represent the views of the U.S. Census Bureau. All results have been reviewed to ensure that no confidential information is disclosed. This research uses data from the Census Bureau’s Longitudinal Employer-Household Dynamics Program, which was partially supported by the following National Science Foundation Grants SES-9978093, SES-0339191 and ITR-0427889; National Institute on Aging Grant AG018854; and grants from the Alfred P. Sloan Foundation. Any errors and omissions are the responsibility of the authors. Electronic copy available at: https://ssrn.com/abstract=2880187 The Employee Clientele of Corporate Leverage: Evidence from Family Labor Income Diversification Abstract We study the equilibrium matching between capital structure and employee job risk aversion (the “clientele effect”) by examining individual workers’ family labor income diversification. Consistent with theories, we find a robust, positive relation between a firm’s debt usage and its employees’ family labor income diversification. This relation is stronger for firms with higher labor intensity and those in financial distress. For identification, we exploit the quasi-natural experiment of California Paid Family Leave Legislation, which exogenously increases employees’ family income diversification. Further, we find that higher-leverage firms recruit new employees with greater labor income diversification.We study the equilibrium matching between capital structure and employee job risk aversion (the “clientele effect”) by examining individual workers’ family labor income diversification. Consistent with theories, we find a robust, positive relation between a firm’s debt usage and its employees’ family labor income diversification. This relation is stronger for firms with higher labor intensity and those in financial distress. For identification, we exploit the quasi-natural experiment of California Paid Family Leave Legislation, which exogenously increases employees’ family income diversification. Further, we find that higher-leverage firms recruit new employees with greater labor income diversification.

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