Downward Wage Rigidity, Corporate Investment, and Firm Value

• Other Authors: Cho, DuckKi (Author)
• Format: Doctoral Thesis
• Language: English
• Published: 2017
• Subjects: Finance; Labor economics; Corporate Investment; Downward Wage Rigidity; Minimum Wage Laws; Theory of Second Best
• Online Access: http://hdl.handle.net/2286/R.I.43981

abstract: Firms reduce investment when facing downward wage rigidity (DWR), the inability or unwillingness to adjust wages downward. I construct DWR measures and exploit staggered state-level changes in minimum wage laws as an exogenous variation in DWR to document this fact. Following a minimum wage increase, firms reduce their investment rate by 1.17 percentage points. Surprisingly, this labor market friction enhances firm value and production efficiency when firms are subject to other frictions causing overinvestment, consistent with the theory of second best. Finally, I identify increased operating leverage and aggravation of debt overhang as mechanisms by which DWR impedes investment. === Dissertation/Thesis === Doctoral Dissertation Business Administration 2017