Understanding The Impact and Implications of Labor Leverage on Cash Holdings

This paper examines the role of labor leverage in determining cash held by companies on their balance sheets. Labor leverage is defined as an off-balance sheet intangible liability that is created by the fixed obligation for firms to pay wages to their workers. In this study, I analyze both unconstrained and constrained firms and find that the risk associated with labor leverage plays an important part on how much cash companies can hold. I find that unconstrained firms have higher levels of cash holdings to cover the labor leverage liability, while constrained firms are not able to hold cash because of their constrained nature. These results are robust to alternative specifications including and excluding industry and year dummies, as well as the use of firm fixed effects, and are mostly consistent across industries and over time