Scandinavian Working Papers in Economics

Working Paper Series,
Uppsala University, Department of Economics

No 1998:18: Firms' Financial Policy and Labour Demand: Theory and Evidence

Pål Bergström and Sara Lindberg
Additional contact information
Pål Bergström: Trade och Capital Markets, Postal: SE-banken, Box 160 67, SE-103 22 Stockholm, Sweden
Sara Lindberg: Department of Economics, Postal: Uppsala University, P.O. Box 513, SE-751 20 Uppsala, Sweden

Abstract: We investigate the influence of financial leverage on firms' hiring decisions in the context of a hierarchy of finance model. The analysis is based on the Euler equation of employment in the presence of convex adjustment costs. We show the empirical implications of firms facing a hierarchy of financial costs, and estimate a linearised version of the model on a large panel of Swedish manufacturing firms. Bootstrap methods are utilised to alleviate some of the estimation problems involved. The empirical findings indicate that the influence of financial leverage on firms' hiring decisions differs significantly between firms in different financial regimes.

Keywords: Employment Determination; Financial Policy; Panel Data

JEL-codes: D92; G32; J23

30 pages, September 1, 1998

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