How Do Legal Form and Firm Size Influence the Impact of Financial Flexibility on Employment?

Abstract

Recent economic crises have highlighted the importance of employment preservation from both a macro- and microeconomic perspective. Considering that pursuing financial flexibility (FF) can be an effective plan to protect human capital, we disentangle which companies benefit the most from a low-leverage strategy. We propose a continuous FF variable and use panel data on a sample of 3,933 Spanish firms to provide new evidence on this topic. Our results show that FF safeguards employment. In addition, our empirical evidence suggests that more debt-dependent companies benefit the most from remaining financially flexible. More specifically, the positive effect of FF on a firm’s employment level is more substantial in private versus public and small versus large companies. Ultimately, small private companies, being more debt-dependent, benefit the most from FF in terms of avoiding job cuts. Given that the majority of firms in Spain are small private firms, we provide new insights into how FF promotes employment preservation.

Keywords: capital structure, financial flexibility, employment, legal form, firm size