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Josef Zechner

Video Josef Zechner

Josef Zechner

Researcher of the Month

The prob­lems with debt-­based fin­an­cing – per­son­nel costs as a key factor

An ef­fi­cient flow of cap­ital to com­pan­ies is the main pil­lar hold­ing up the real economy. Many coun­tries, Aus­tria in­cluded, of­fer tax breaks that in­dir­ectly sub­sid­ize cor­por­ate bor­row­ing, be­cause in­terests paid to cred­it­ors count as de­duct­ibles and re­duce a com­pany’s tax burden. A re­cent study by WU Pro­fessor Josef Zech­ner shows how the gov­ern­ment’s in­dir­ect sub­sid­iz­a­tion of cor­por­ate debt leads to higher risks for em­ploy­ees.

Fin­an­cing a com­pany with bor­rowed cap­ital ap­pears to be luc­rat­ive in many coun­tries. Aus­tria is one of the coun­tries that of­fer tax in­cent­ives which fa­vor debt over in­ternal fin­an­cing, par­tic­u­larly by al­low­ing in­terest pay­ments to be de­duc­ted from com­pan­ies’ tax­able in­come. In Aus­tria, the tax de­duc­tions gran­ted to a com­pany that cov­ers 60% of its fin­an­cing needs with bor­rowed cap­ital cor­res­pond to roughly 15% of the com­pany’s total value. But debt-­based fin­an­cing also has many dis­ad­vant­ages. In several of his stud­ies, WU Pro­fessor Josef Zech­ner from the In­sti­tute for Fin­ance, Bank­ing and In­sur­ance has in­vestig­ated the factors that are rel­ev­ant when it comes to se­lect­ing an ap­pro­pri­ate fin­an­cing struc­ture for com­pan­ies. His re­search shows that even though per­son­nel costs are one of the key factors for de­cid­ing on the right fin­an­cing struc­tures, they often tend to be over­looked.

The higher the debts, the higher the risks

The more debt a com­pany ac­cu­mu­lates, the higher its risk of slip­ping into bank­ruptcy. “A high bank­ruptcy risk has a num­ber of con­sequences: Par­tic­u­larly in highly spe­cial­ized in­dus­tries, cus­tomers will lose trust in the com­pany. There will also be a drop in in­vest­ments when cred­it­ors be­come re­luct­ant to provide fresh cap­ital for the com­pany due to the high bank­ruptcy risk,” Pro­fessor Zech­ner points out. “One key factor that often doesn’t re­ceive enough at­ten­tion are per­son­nel costs. Par­tic­u­larly in spe­cial­ized in­dus­tries, em­ploy­ees have to ex­pect fin­an­cial losses in the event of their com­pany go­ing bank­rupt.” If they still want be able to hire qual­i­fied em­ploy­ees, com­pan­ies with sub­stan­tial debts have to of­fer them higher salar­ies right from the start to bal­ance out these risks. Model sim­u­la­tions show that an in­crease in a com­pany’s debt ra­tio from 30% to 60% would cause its salary costs to rise by around 14%.

Mis­guided tax in­cent­ives

The res­ults of Josef Zech­ner’s em­pir­ical stud­ies, con­duc­ted on the basis of data from in­ter­na­tional power gen­er­a­tion com­pan­ies, con­firm his the­or­et­ical find­ings. Many en­ter­prises, par­tic­u­larly in spe­cial­ized in­dus­tries, are seek­ing to re­duce com­pet­it­ive risks for em­ploy­ees and are in­creas­ingly fo­cus­ing on in­ternal fin­an­cing to keep costs down. “It’s hard to un­der­stand why the gov­ern­ment is still sub­sid­iz­ing debt-­based fin­an­cing. In many cases, debt-­based fin­an­cing also has dis­ad­vant­ages for em­ploy­ees, for in­stance a higher risk of los­ing their jobs and in­come in the event that their em­ployer goes bank­rupt. In spe­cial­ized in­dus­tries, this means that em­ploy­ers have to spend more money on salar­ies,” Pro­fessor Zech­ner ex­plains.