Threats to human capital: The effect of health risk on corporate financial policy

Abstract

I examine the relation between threats to human capital and corporate financial policy using morbidity and mortality data related to infectious diseases. I observe a strong association between deteriorating health and declines in leverage, which seems to be influenced by increasing human capital costs offsetting debt benefits. Firms consider reducing debt as a strategic response to perceived employee valuation of human capital insurance, which tends to be affected by a disease-induced rise in human capital costs. This association appears more pronounced in technology firms, distressed firms, and labor-intensive firms, and during higher disease-induced labor uncertainty, with some moderation by labor unions.