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Human Capital, Bankruptcy, and Capital Structure





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    • Berk is at Stanford University and the National Bureau of Economic Research. Stanton is at U.C. Berkeley. Zechner is at Vienna University of Economics and Business Administration. The authors thank Jin Yu for valuable research assistance, and gratefully acknowledge helpful comments and suggestions from Michael Fishman, Michael Fuerst, Richard Green, Christopher Hennessy, Ben Hermalin, Mike Lemmon, Erwan Morellec, Michael Roberts, Jacob Sagi, Ivo Welch, Campbell Harvey (the editor), an anonymous associate editor, and an anonymous referee. We are grateful for financial support from the Fisher Center for Real Estate and Urban Economics.


We derive the optimal labor contract for a levered firm in an economy with perfectly competitive capital and labor markets. Employees become entrenched under this contract and so face large human costs of bankruptcy. The firm's optimal capital structure therefore depends on the trade-off between these human costs and the tax benefits of debt. Optimal debt levels consistent with those observed in practice emerge without relying on frictions such as moral hazard or asymmetric information. Consistent with empirical evidence, persistent idiosyncratic differences in leverage across firms also result. In addition, wages should have explanatory power for firm leverage.