I study how firing costs affect firms’ borrowing costs. Exploiting a labor market reform, I find that higher firing costs increase firm output and reduce borrowing costs. To explain these findings, I develop a model of competition between two firms. An increase in firing costs raises workers’ reservation value of staying with their current employer, making them less responsive to outside offers and reducing labor mobility. In equilibrium, firms respond by investing more in worker human capital. This raises productivity and lowers default risk, leading to lower borrowing costs.