Working Paper: NBER ID: w25325
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; Regional Business Cycles; Employment Growth
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 |
|---|---|
| regional firm leverage (R30) | regional employment growth (short run) (R11) |
| regional firm leverage (R30) | regional employment growth (medium run) (R11) |
| larger buildups in firm leverage (G32) | stronger short-run growth (O49) |
| larger buildups in firm leverage (G32) | stronger medium-run declines in aggregate regional employment (R11) |
| larger buildups in firm leverage prior to a recession (F65) | larger employment losses during the recession (J65) |
| changes in regional firm leverage (G32) | employment and wage changes at nonlisted firms (J39) |
| increases in leverage (G32) | subsequent downturns in economic activity (E32) |