Skilled labor and bank loan contracting

L Cheng (First Author), R Li (Participant Author), ZM Ma (Participant Author), LF Ruan (Participant Author)

Research output: Contribution to journalJournal


This paper examines the credit risk implications of a firm's reliance on skilled labor and provides an empirical analysis of the effect of skilled labor on loan contracting outcomes. Using a sample of listed US firms from 1998 to 2017, we predict and find that banks charge higher interest rates to firms relying on high-skill workers than low-skill workers. This effect is stronger for firms with higher asset-based operating leverage, higher probabilities of employee turnover and severer conflicts of interest between equity holders and debt holders. In addition, consistent with the idea that banks consider the specific costs and benefits associated with skilled labor, we show that a firm's reliance on skilled labor is positively (negatively) associated with the relative usage of capital (performance) covenants. Our results hold when applying different matching methods, fixed-effect models or exogenous shocks from two quasi-natural experiments. Overall, our study demonstrates the impact of skilled labor, an important labor-force heterogeneity, on debt contract design and contributes to the understanding of the interaction between labor and capital, that is, the two primary inputs of a firm.
Original languageEnglish
Number of pages37
JournalJournal of Business Finance and Accounting
Early online date15 Mar 2023
Publication statusPublished - 2023

Corresponding author email


  • Capital covenants
  • Interest spreads
  • Loan contracts
  • Performance covenants
  • Skilled labor

Indexed by

  • ABDC-A*
  • SSCI


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