Prof. Josef Zechner from the University of Vienna is giving a VGSF research
seminar on "Human Capital, Bankruptcy, and Capital Structure" on Friday,
June 2nd, from 15:30 to 17:00 at the Institute for Advanced Studies
(Institut für Höhere Studien, Stumpergasse 56, 1060 Wien), Lecture Room (HS)
2. Please find the paper's abstract below.
Coffee and snacks are going to be available in the cafeteria of IHS, which
is located next to the lecture room, before and after the seminar.
Information regarding the further schedule of the VGSF research seminar can
be found at
www.vgsf.ac.at!
Best,
Michael Halling
Abstract
This paper identifies a previously overlooked friction, human capital risk,
which can explain an important puzzle in corporate finance why firms
maintain such low levels of debt, given the apparently modest costs of
bankruptcy. We derive the optimal compensation contract when employees are
averse to their own human capital risk, but equity holders are not averse to
this risk, and show that, in the absence of other frictions, all firms will
be unlevered. In the presence of corporate taxes, optimal debt levels are
consistent with the levels observed, implying that human capital risk is of
the same order of importance as taxes in the capital structure decision.
Because these costs are impossible to measure directly, existing empirical
studies that attempt to measure the costs of bankruptcy grossly
underestimate them.