Labor-Capital Substitution and Capital Structure: Evidence from Automation

This paper presents evidence that the exposure to automation technologies has a positive impact on a firm’s financial leverage. The effects are more pronounced in firms with greater labor costs, routine task intensity, firing costs, and union coverage. The results are robust when we instrument a firm’s exposure to automation technologies using the robotics adoption in European countries. Our analysis suggests that the exposure to automation technologies creates a replacement threat that weakens workers’ bargaining power, compressing their wage premiums for bearing financial distress risk and reducing wage rigidity, both of which allow firms to increase financial leverage.