Financial Flexibility and Corporate Employment
Posted: 20 Apr 2021 Last revised: 14 Sep 2022
Date Written: May 30, 2022
We study the role of financial flexibility on firms’ workforce reduction decisions during a time of extreme economic uncertainty. Using daily data from the start of the COVID-19 pandemic —March through May 2020 — for 354 of the largest U.S. employers, we first descriptively show that negatively shocked firms were 39.2 percentage points more likely to reduce their workforce than positively shocked firms. Our central finding is that pre-pandemic financial flexibility significantly reduces the likelihood of workforce reductions. We further demonstrate that the attenuating role of financial flexibility is greatest among firms with better governance and those with more asymmetric cost structures. Firms with stronger pre-pandemic commitments to employees are more likely to retain workers, regardless of their financial flexibility. These results provide insights on both financial and non-financial characteristics influencing workforce decisions, thereby informing managers about employment decisions in times of economic uncertainty.
Keywords: Employment, financial flexibility, COVID-19, pandemic
JEL Classification: G31, J01, J20, J30, M40, M50
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