Debt, Labor Markets and the Creation and Destruction of Firms

39 Pages Posted: 14 Mar 2012

See all articles by Andres Almazan

Andres Almazan

University of Texas at Austin - Department of Finance

Adolfo de Motta

McGill University - Desautels Faculty of Management

Sheridan Titman

University of Texas at Austin - Department of Finance; National Bureau of Economic Research (NBER)

Date Written: February 22, 2012

Abstract

We analyze the financing decisions of firms that face a labor market with search frictions and examine public policy choices that influence the firms’ financing and liquidation choices. In our model, debt facilitates the process of creative destruction (i.e., the elimination of inefficient firms to facilitate the creation of new firms) but may induce excessive liquidation and unemployment; in particular, during economic downturns. Within this setting we examine 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: Debt financing, liquidation, macroeconomic policy, creative destruction

JEL Classification: G33, G39, E58, E62

Suggested Citation

Almazan, Andres and de Motta, Adolfo and Titman, Sheridan, Debt, Labor Markets and the Creation and Destruction of Firms (February 22, 2012). Available at SSRN: https://ssrn.com/abstract=2021162 or http://dx.doi.org/10.2139/ssrn.2021162

Andres Almazan (Contact Author)

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States
512-471-4368 (Phone)
512-471-5073 (Fax)

HOME PAGE: http://www.mccombs.utexas.edu/dept/finance/faculty/profiles/index.asp?addTarget=4

Adolfo De Motta

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1
Canada

Sheridan Titman

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States
512-232-2787 (Phone)
512-471-5073 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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