Labor-Replacing Automation and Finance.

This article investigates the impact of labor-replacing automation—specifically industrial robot adoption—on corporate financing using firm-level panel data from Chinese manufacturing firms. Empirical evidence shows that firms deploying industrial robots exhibit higher leverage ratios and lower cost of debt, a relationship supported by difference-in-differences and instrumental variable analyses suggesting causality. The authors propose a theoretical model where automation capital substitutes labor, thereby hedging firms against labor cost fluctuations, which reduces cash flow variability and credit risk, enabling greater debt capacity and lower interest rates. Further empirical tests confirm that these effects are stronger in firms and industries with higher labor contribution, greater robot-labor substitutability, and lower robot adjustment costs, and are more pronounced among financially constrained firms. The findings extend beyond industrial robots to broader labor-replacing automation technologies and have implications for targeted industrial policies promoting automation adoption.