Working Paper: CEPR ID: DP10539
Authors: Xavier Giroud; Holger M. Mueller
Abstract: We argue that firms? balance sheets were instrumental in the propagation of shocks during the Great Recession. Using establishment-level data, we show that firms that tightened their debt capacity in the run-up (?high-leverage firms?) exhibit a significantly larger decline in employment in response to household demand shocks than firms that freed up debt capacity (?low-leverage firms?). In fact, all of the job losses associated with falling house prices during the Great Recession are concentrated among establishments of high-leverage firms. At the county level, we find that counties with a larger fraction of establishments belonging to high-leverage firms exhibit a significantly larger decline in employment in response to household demand shocks. Thus, firms? balance sheets also matter for aggregate employment.
Keywords: financial accelerator; firm balance sheet channel; leverage; unemployment
JEL Codes: E24; E32; G32; R3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| high-leverage firms (G32) | reduced ability to raise external funds (G32) |
| low-leverage firms (G32) | maintain operations during demand shocks (E37) |
| high-leverage firms (G32) | larger decline in employment (J63) |
| household demand shocks (D12) | decline in employment (J63) |
| counties with high fraction of high-leverage firms (R30) | significant decline in employment (J63) |