60 Pages Posted: 11 Oct 2016
Date Written: October 10, 2016
We assemble a new, quarterly panel dataset of U.S. firms that links firms' investment and financing decisions to their employment and wages. We find that wages and leverage are strongly negatively related, both cross-sectionally and within firms, while the negative link between employment and leverage is smaller and less robust. We interpret these facts in a model that integrates a theory of costly debt and equity financing with rich firm-level dynamics, including labor and capital adjustment frictions and wage setting. Estimation of the model's parameters shows that the model can reconcile several moments relating to debt, wages, employment, and investment. We find that both financing frictions and labor bargaining are important for inducing a negative relation between debt and leverage, both qualitatively and quantitatively. Our counterfactuals show that raising financing costs reduces employment and wages, in line with recent reduced-form evidence.
Keywords: wage bargaining, financial frictions, factor demand
JEL Classification: E22, E24, G31, G32
Suggested Citation: Suggested Citation
Michaels, Ryan and Page, T. Beau and Whited, Toni M., Labor and Capital Dynamics Under Financing Frictions (October 10, 2016). Available at SSRN: https://ssrn.com/abstract=2850790 or http://dx.doi.org/10.2139/ssrn.2850790