Firm Leverage and Unemployment during the Great Recession

Holger Mueller and Xavier Giroud

No 10539, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 (search for similar items in EconPapers)
JEL-codes: E24 E32 G32 R3 (search for similar items in EconPapers)
Date: 2015-04
New Economics Papers: this item is included in nep-bec, nep-mac and nep-ure
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Citations: View citations in EconPapers (47)

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