Financial Flexibility and Corporate Employment

Abstract

We study the role of financial flexibility on COVID-19 employment actions. Using daily data from March through May 2020 for 354 of the largest U.S. employers, we first quantify the effect of the pandemic on employees: Firms facing a negative demand shock were 28.8 percentage points more likely to reduce their workforce and 15.6 percentage points less likely to provide pay increases to frontline workers, compared to other sample firms. We then show that pre-pandemic financial flexibility attenuates these pandemic effects, reducing the likelihood of workforce reductions by almost half. The role of financial flexibility is greatest in firms with better governance, a more asymmetric cost structure, and better pre-pandemic treatment of workers.

Keywords: Employment, financial flexibility, COVID-19, pandemic

JEL Classification: G31, J01, J20, J30, M40, M50