Working Paper: CEPR ID: DP12568
Authors: Franklin Allen; Elena Carletti; Yaniv Grinstein
Abstract: The relationship between changes in GDP and unemployment during the 2008 financial crisis differedsignificantly from previous experiences and across countries. We study firm-level decisions inFrance, Germany, Japan, the UK, and the US. We find significant differences between the responseof US and non-US firms. US firms significantly decreased their production costs relative to firms inother countries. They have also reduced debt, reduced dividend payout, and increased their cashholdings compared to firms in other countries. The differences are, in general, explained bydifferences in financial leverage. However, financial leverage does not explain differences betweenproduction decisions in German and U.S. firms and between Japanese and US firms. We argue thatdifferences in firm governance between US firms and firms in Germany and Japan drive theseresponses. US firms are more prone to cut labor costs and reduce leverage compared to German firmsand Japanese firms in order to achieve larger profits and a larger cash-cushion in the short-run.
Keywords: Okun's Law; Corporate Governance; Firm-Level Decisions
JEL Codes: E30; G01; G32; G34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Financial leverage (G32) | Production cost adjustments (D24) |
| US firms' financial leverage (G32) | US firms' production cost adjustments (D22) |
| Financial leverage (G32) | Changes in production decisions (D24) |
| Governance structures (G38) | Labor cost adjustments (J39) |
| Differences in governance structures (G38) | Labor cost reductions in US firms (J39) |
| Governance differences (G38) | Varying responses to financial shocks (E44) |