UCLA

Intangible capital embodied in the firm’s key employees has become an increasingly

important factor of production. Potential separation of employees upon default

reduces the expected remaining value of the firm’s asset. Therefore, investors should

expect lower recovery rates and require higher bond spreads for labor-intensive firms.

I construct a market-based proxy for firm-level recovery rates and show that recovery

rate variations are an important determinant of bond spreads. Then I find firms with

relatively higher labor shares have lower average recovery rates and higher spreads

through quasi-experiments.