Corporate financial
leverage in Canadian manufacturing: Consequences for employment and inventories
by
Andrew Heisz and Sébastien LaRochelle-Côté
Business and
Labour Market Analysis Division
Analytical Studies Branch research paper series,
No. 217
Context
Firms typically prefer to maintain their workforces
when sales drop because of the costs associated with hiring and severance of employees.
A firm with higher debt levels will have a harder time maintaining their workforces
because they have more cash flow dedicated to interest payments and may find it
more difficult to borrow additional capital (i.e. they face credit constraints).
The proportion of debt in Canadian firms increased substantially during the last
four decades and this study suggests that less employment stability is a possible
consequence of higher leverage at the firm.
Objectives
The paper
investigates first, the link between financial structure and employment growth
and second, the link between financial structure and inventory growth among incorporated
Canadian manufactures from 1988 to 1997.
Findings
Firms with higher
leverage shed nearly 10% more labour than finically healthier firms for a given
drop in product demand, suggesting that credit constraints may be an important
factor in amplifying a firm's response to a decrease in sales.
The influence
was larger during the recession of 1990 to 1992 and was also greater in sectors
that experienced larger cyclical fluctuations. These stylized facts are consistent
with the idea of a "flight to quality" in credit markets, and that credit constraints
amplify a firm's response to a decrease in sales.
Data source:
T2 corporate tax records linked to Longitudinal Employment
Analysis Program 1988-1997.
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the article in the Daily about this publication.
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the full publication.
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