The Impact of Unemployment on Corporate Debt Policy of Quoted Nigerian Firms

Abstract

The impact of labour market friction on corporate debt policy remains an underexplored
area in corporate finance. Unemployment risk is a considerable issue for workers but,
despite this, workers’ unemployment costs are largely absent from corporate financial
theories, which typically do not emphasise labour market friction. This study
investigates the interaction of labour unemployment risk with corporate borrowing in
Nigeria. The population of study comprises all non-financial corporations quoted on the
Nigerian Stock Exchange (NSE) for the period 1999-2014 out of which 50 companies that
met the minimum data criteria were selected. Using panel data regression, the research
documents its findings, providing new evidence that financing decisions interact with
non-financial stakeholders. Specifically, the results support use of the capital structure as
a weak bargaining tool for companies but also as a possible bargaining variable for
workers. Employee bargaining increases with leverage. In other words, highly levered
firms exert pressure on themselves to treat employees decently. Unemployment exerts a
downward pressure on corporate borrowing. Thus, unemployment risk provides a partial
explanation for the conservative financial policies of quoted Nigerian firms, thereby
partly accounting for the low leverage puzzle for some firms. Given the significant
unemployment problem in Nigeria, compounded by a weak social safety net for workers,
the study recommends promotion of corporate policies that strengthen conservative debt
usage in industries where human capital risk is concentrated.