Topic: The Elephant in the Room: the Impact of Labor Obligations on Credit Risk

Speaker: Xiaoji Lin, Assistant Professor of Finance, Department of Finance, Ohio State University

Date: May 13^th (Fri.)

Time: 1:30pm-2:30pm

Location: Building 4, Room 101

Language: English

Abstract:

We study the impact of labor market frictions on credit risk. Our central finding is that labor market variables are first-order in accounting for both aggregate and firm-level variations in credit risk and capital structure. Labor market variables (wage growth or labor share) forecast the aggregate credit spread as well as or better than alternative predictors. Furthermore, firm-level labor expense growth rates and labor share can predict Moody-KMV expected default frequency (EDF) in the cross-section across a wide range of countries. These variables also explain firm-level capital structure decisions. A model with wage rigidity and risky long-term debt can explain these links as well as produce large credit spreads despite realistically low default probabilities. This is because pre-committed payments to labor make other committed payments (such as debt) riskier; this effect is amplified when debt is long-term.

About the speaker:

Xiaoji Lin is an assistant professor of finance at Department of Finance, Ohio State University (OSU) from 2011. Before he joined OSU, he has worked at London School of Economics and Political Science as assistant professor. His current research interests are theoretical and empirical asset pricing in connection with corporate finance and macroeconomics. Dr. Lin earned his Ph.D. in finance from University of Minnesota in 2008 and his M.A. in economics was got from Nankai University. Dr. Lin has articles published in Journal of Monetary Economics, Review of Financial Studies, and Journal of Financial Economics among others.