Threats to human capital: The effect of health risk on corporate financial policy

I examine the relation between threats to human capital and corporate financial policy using morbidity and mortality data related to infectious diseases. I observe a strong association between deteriorating health and declines in leverage, which seems to be influenced by increasing human capital costs offsetting debt benefits. Firms consider reducing debt as a strategic response to perceived employee valuation of human capital insurance, which tends to be affected by a disease‐induced rise in human capital costs. This association appears more pronounced in technology firms, distressed firms, and labor‐intensive firms, and during higher disease‐induced labor uncertainty, with some moderation by labor unions.