Labor-capital substitution and capital structure: evidence from automation

Abstract

This paper presents evidence that the exposure to automation technologies has a positive impact on a firm’s financial leverage. The effects are more pronounced in firms with greater labor costs, routine task intensity, firing costs, and union coverage. The results are robust when we instrument a firm’s exposure to automation technologies using the robotics adoption in European countries. Our analysis suggests that the exposure to automation technologies creates a replacement threat that weakens workers’ bargaining power, compressing their wage premiums for bearing financial distress risk and reducing wage rigidity, both of which allow firms to increase financial leverage. Valuation Insight: Firm access to automation technologies reduces the bargain power of its workers. This reduces wages and enhances labor contract flexibility, improving firm value. The firm is accordingly able to borrow more which may further enhance its valuation.