Debt, labor markets, and the creation and destruction of firms

Andres Almazan, Adolfo de Motta and Sheridan Titman

Journal of Financial Economics, 2015, vol. 118, issue 3, 636-657

Abstract: We analyze the financing and liquidation decisions of firms that face a labor market with search frictions. By inducing bankruptcy, debt can facilitate the process of creative destruction (i.e., the elimination of inefficient firms and the creation of new firms) but can also lead to excessive liquidation and unemployment in particular, during economic downturns. Within this setting, we examine policy interventions that influence the firms׳ financing and liquidation choices. We consider the role of monetary policy, which can reduce debt burdens during economy-wide downturns, and tax policy, which can influence the incentives of firms to use debt financing.

Keywords: Capital structure; Debt; Labor markets; Unemployment; Corporate taxes (search for similar items in EconPapers)
JEL-codes: E24 E30 E60 G33 G38 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:118:y:2015:i:3:p:636-657

DOI: 10.1016/j.jfineco.2015.06.009

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