Abstract
The importance of skilled labor and the inalienability of human capital may expose firms to fragility stemming from possible loss of talent. Using detailed employer-employee matched data from Sweden, we document that firms lose their most skilled workers as they approach financial distress. Consequently, firms that rely more on talent operate with more conservative capital structures. In a quasi-experimental setting—employing a change in Swedish labor law that exogenously increases the mobility of workers—we find that as the risk of losing talent increases, financial leverage decreases.