Paper Spotlight: Skilled Labor Risk and Corporate Policies

Yue Qiu

Tracy Yue Wang

Human capital has become an increasingly important asset for firms operating in many industries, not just in the more technological areas. Competition for talent is increasing, prompting the questions regarding, first, the attraction and, second, retention of skilled labor. Firms face labor mobility risk, especially in the case of skilled labor, which can hamper firm operations along many different dimensions. In the paper titled “Skilled Labor Risk and Corporate Policies,” Yue Qiu and Tracy Yue Wang examine firms’ skilled labor risk, defined as the risk of failing to attract and retain skilled labor, and the subsequent impact on corporate policies. The first task in the paper is measuring, at the firm-year level, firms’ skilled labor risk which can then be used to investigate its importance to firm operations. The authors propose a skilled labor risk based on the intensity of firms’ discussions of this particular type of risk in their 10-K filings. The first round of results confirm that the measure proposed by the authors captures firms’ concerns about the mobility of their skilled labor. For example, firms discuss more about the skilled labor risk in their 10-Ks when they experience or anticipate turnovers of productive skilled labor and when their headquarter states introduce laws that influence the mobility of skilled labor. The paper then uses this measure to examine firms’ compensation policies. Evidence suggests that firms’ compensation policies are sensitive to the skilled labor risk: firms pay a significant premium to skilled labor and structure the compensation more towards incentive pay when they are concerned about skilled labor mobility. This evidence is consistent with the view that skilled labor’s mobility empowers workers relative to shareholders. Furthermore, important corporate policies such as financial leverage, cash holdings, and M&As also interact with skilled labor risk. Overall, these results show how skilled labor risk can engender a profound impact on many important aspects of corporate finance, especially in the case of the so-called “new firm,” operating in the technological fields.

Spotlight by Andrew Ellul
Photos courtesy of 
Yue Qiu and Tracy Yue Wang

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