Labor-Replacing Automation and Finance

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. This paper was accepted by Victoria Ivashina, finance. Funding: X. Cheng acknowledges support from the Humanities and Social Science Foundation of the Ministry of Education in China [Grant 23YJC840004] and the Fundamental Research Funds for the Central Universities of China [Grant 2722023BQ052]. E. Lyandres acknowledges support from the Coller Foundation and the Henry Crown Institute for Business Research in Israel. K. Zhou acknowledges support from the Major Project of the National Social Science Foundation of China [Grant 20&ZD103], the Key Project of the National Natural Science Foundation of China [Grant 72432005], and the Excellent Young Team Project of the Natural Science Foundation of Guangdong Province of China [Grant 2023B1515040001]. T. Zhou acknowledges support from the National Natural Science Foundation of China [Grant 72003206]. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2022.02658 .