Working Paper: CEPR ID: DP13355
Authors: Xavier Giroud; Holger M. Mueller
Abstract: This paper shows that buildups in firm leverage predict subsequent declines in aggregate regional employment. Using confidential establishment-level data from the U.S. Census Bureau, we exploit regional heterogeneity in leverage buildups by large U.S. publicly listed firms, which are widely spread across U.S. regions. For a given region, our results show that increases in firms' borrowing are associated with "boom-bust" cycles: employment grows in the short run but declines in the medium run. Across regions, our results imply that regions with larger buildups in firm leverage exhibit stronger short-run growth, but also stronger medium-run declines, in aggregate regional employment. We obtain similar results if we condition on national recessions-regions with larger buildups in firm leverage prior to a recession experience larger employment losses during the recession. When comparing regional firm and household leverage growth, we find qualitatively similar patterns for both. Finally, we find that regions whose firm leverage growth comoves more strongly also exhibit stronger comovement in their regional business cycles.
Keywords: firm leverage; business cycles
JEL Codes: E24; E32; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increases in firm leverage (G32) | short-run growth in regional employment (R11) |
| increases in firm leverage (G32) | medium-run declines in regional employment (R11) |
| regional firm leverage buildups (R30) | larger employment losses during national recessions (J65) |
| comovement of regional firm leverage growth (R11) | stronger comovement in regional business cycles (F44) |