Firm Leverage, Consumer Demand, and Employment Losses During the Great Recession*

Abstract

We argue that firms' balance sheets were instrumental in the propagation of consumer demand shocks during the Great Recession. Using establishment-level data, we show that establishments of more highly levered firms exhibit a significantly larger decline in employment in response to a drop in consumer demand. These results are not driven by firms being less productive, having expanded too much prior to the Great Recession, or being generally more sensitive to fluctuations in either aggregate employment or house prices. At the county level, we find that counties with more highly levered firms experience significantly larger job losses in response to county-wide consumer demand shocks. Thus, firms' balance sheets also matter for aggregate employment. Our research suggests a possible role for employment policies that target firms directly besides conventional stimulus.

Leverage and Deepening Business Cycle Skewness

“…7 Debt overhang and business cycle asymmetries This evidence is consistent with our cross-state evidence, as well as with the results of Mian and Su… (2010) and Giroud and Mueller (2017), who document a strong connection between the severity of the Great Recession and the pre-crisis leverage of households and …rms at the county level, respectively.…”

“…This narrative of the boom-bust cycle characterized by a debt overhang is consistent with the results of Mian and Su… (2010), who identify a close connection at the county level in the US between pre-crisis household leverage and the severity of the Great Recession. Likewise, Giroud and Mueller (2017) document that, over the same period, counties with more highly leveraged …rms su¤ered larger employment losses.…”

Macroeconomic Policy, Product Market Competition, and Growth

“…Also related to this paper is the recent literature on how the 2008-2009 global financial crisis (GFC) affected firms. Using firm-level data for the U.S., several papers find that financial frictions amplified the adverse impact of the GFC on employment; those firms with weaker corporate balance sheets (Giroud and Mueller, 2017;Dinlersoz et al, 2018), that had a relationship with weak banks (Chodorow-Reich, 2014), faced greater refinancing risk (Benmelech, Bergman and Seru, 2011) or were smaller and younger (Siemer, 2016) experienced greater job losses, all else equal. Other papers focus on the productivity losses from such financial frictions, such as De Ridder (2016) for U.S. firms, Huber (2018) for German firms and counties, or Duval, Hong and Timmer (2020) for a cross-country panel of firms.…”

Financing of Firms, Labor Reallocation, and the Distributional Role of Monetary Policy*

“…Taking into account firm size and age, Fort et al (2013) find that small/young firms were particularly affected by the Great Recession. Giroud and Mueller (2017) show that establishments of high-leverage firms, who act like financially constrained firms, experienced a significantly larger decline in employment between 2007 and 2009 than establishments of low-leverage firms. However, Crouzet and Mehrotra (2018) document limited and statistically insignificant differences in the sensitivity of sales and investment of small versus large firms during the later periods in their study.…”