Labor Heterogeneity, Labor Adjustment Costs, and Externally Financed Firm Growth

Highlights • Because skilled workers entail higher hiring and firing expenses, firms tend to retain skilled workers in the face of the high labor adjustment costs (LACs). • The retention of skilled workers imposes inflexibility on business operations and exposes firms to cash flow shocks. • Firms with high LACs hoard precautionary cash in the face of higher cash flow risk. • We find a positive relationship between LACs and externally financed firm growth. • Equity is the major source of external funds for firm growth in the face of high LACs. • The retention of skilled workers elevates conflicts between financial and non-financial stakeholders of the firm. • Ineffective monitoring is a channel connecting LACs and externally financed growth.