We examine the effects of adoption of labor-replacing automation technology on corporate financing. Empirically, using Chinese firm-level panel data on deployment of industrial robots as an example of such automation, we find that robot adoption increases leverage and reduces cost of debt. We hypothesize that the underlying reason is that being a substitute for labor, automation provides a hedge against fluctuations in labor costs. A model based on this hedging argument delivers additional testable predictions concerning determinants of the relation between automation and corporate financing. These relations are borne out in the data, providing support for the proposed mechanism. Our evidence is inconsistent with alternative channels
behind the observed relations.
Comments