I examine how the labor market in which firms operate affects their capital structure decisions. Using the US Census Bureau data, I exploit a large plant opening as an abrupt increase in the size of a local labor market. I find that a new plant opening leads to a 2.6% to 3.9% increase in the debt-to-capital ratio of existing firms in the "winner" county relative to the "runner-up" choice. This result is consistent with larger labor markets making a job loss less costly, which in turn reduces

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... irect costs of financial distress. Moreover, this spillover effect is larger for firms 1) that have a larger fraction of employees in the affected county, 2) that employ the same type of workers as the new plant, and 3) that have larger unexploited benefits of debt. * * This paper is based on my PhD dissertation at Duke University. I am indebted to my committee members, Peter Arcidiacono, Alon Brav, John Graham (Chair), Manju Puri, and S. Viswanathan. I appreciate helpful comments from Ashwini Agrawal (discussant),