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Labor and Capital Dynamics Under Financing Frictions

60 Pages Posted: 11 Oct 2016  

Ryan Michaels

University of Rochester - Department of Economics

T. Beau Page

Tulane University - Finance & Economics

Toni M. Whited

University of Michigan, Stephen M. Ross School of Business; National Bureau of Economic Research

Date Written: October 10, 2016

Abstract

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

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

Ryan Michaels

University of Rochester - Department of Economics ( email )

Harkness Hall
Rochester, NY 14627
United States

Beau Page

Tulane University - Finance & Economics ( email )

A.B. Freeman School of Business
7 McAlister Drive
New Orleans, LA 70118
United States

Toni M. Whited (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

National Bureau of Economic Research ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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