Anna Milanez, Business Economics PhD
The Human Capital Costs of Financing Constraints
This paper explores the link between external financing constraints and firm-level employment decisions. I introduce new data on the occupations of workers affected in mass layoff instances, which allows me to examine layoff behavior as well as the type of human capital dismissed. To isolate the effect of financial constraints on employment decisions, I exploit firm-level variation in the amount of debt coming due at the onset of the 2007-2009 financial crisis. I find that financially constrained firms reduced total employment by more than otherwise similar, unconstrained firms, and were significantly more likely to make a mass layoff. Among firms that made a mass layoff, I find that financially constrained firms laid off high human capital employees, contradicting theoretical labor economics predictions that firms lay off workers in inverse order of the degree of human capital. In looking at stock returns following mass layoff announcements, I find 3-day cumulative abnormal returns to be negatively related to the degree of human capital laid off. These results combine to suggest that financing constraints have a significant impact on firm-level employment outcomes and, in particular, on the type of human capital dismissed.