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Corporate Financial Leverage in Canadian Manufacturing: Consequences for Employment and Inventories

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  • Heisz, Andrew
  • Larochelle-Cote, Sebastien
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    Abstract

    This paper investigates the link between financial structure and employment growth, and the link between financial structure and inventory growth, among incorporated Canadian manufacturers from 1988 to 1997. It finds that financially vulnerable firms - smaller firms and those with higher leverage - shed nearly 10% more labour than financially healthier firms for a given drop in product demand. The influence was larger during the recession of 1990 to 1992 indicating that higher financial vulnerability, reflected in high leverage, may have worsened during that period. The influence was also greater in sectors that experienced larger cyclical fluctuations. On average, firms with high leverage also tend to cut inventories 5% more when a shock in demand occurs.

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    File URL: http://www5.statcan.gc.ca/olc-cel/olc.action?ObjId=11F0019M2004217&ObjType=46&lang=en&limit=0
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    Bibliographic Info

    Paper provided by Statistics Canada, Analytical Studies Branch in its series Analytical Studies Branch Research Paper Series with number 2004217e.

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    Date of creation: 18 Feb 2004
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    Handle: RePEc:stc:stcp3e:2004217e

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    Keywords: Business performance and ownership; Current conditions; Financial statements and performance; Industries; Labour; Manufacturing;

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    References

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    1. Robert E. Carpenter & Steven M. Fazzari & Bruce C. Petersen, 1994. "Inventory (Dis)Investment, Internal Finance Fluctuations, and the Business Cycle," Macroeconomics, EconWPA 9401001, EconWPA.
    2. Charles W. Calomiris & Athanasios Orphanides & Steven A. Sharpe, 1994. "Leverage as a state variable for employment, inventory accumulation, and fixed investment," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 94-24, Board of Governors of the Federal Reserve System (U.S.).
    3. Ben S. Bernanke & Alan S. Blinder, 1988. "Credit, Money, and Aggregate Demand," NBER Working Papers 2534, National Bureau of Economic Research, Inc.
    4. Robert S. Chirinko & Huntley Schaller, 1993. "Why does liquidity matter in investment equations?," Research Working Paper, Federal Reserve Bank of Kansas City 93-13, Federal Reserve Bank of Kansas City.
    5. Judith A. Chevalier & David S. Scharfstein, 1994. "Capital Market Imperfections and Countercyclical Markups: Theory and Evidence," NBER Working Papers 4614, National Bureau of Economic Research, Inc.
    6. Ben Bernanke & Mark Gertler & Simon Gilchrist, 1994. "The Financial Accelerator and the Flight to Quality," NBER Working Papers 4789, National Bureau of Economic Research, Inc.
    7. Eugene F. Fama, 2002. "Testing Trade-Off and Pecking Order Predictions About Dividends and Debt," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 15(1), pages 1-33, March.
    8. Steven Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1987. "Financing Constraints and Corporate Investment," NBER Working Papers 2387, National Bureau of Economic Research, Inc.
    9. Ben S. Bernanke & John Y. Campbell, 1988. "Is There a Corporate Debt Crisis?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 83-140.
    10. Campello, Murillo, 2003. "Capital structure and product markets interactions: evidence from business cycles," Journal of Financial Economics, Elsevier, Elsevier, vol. 68(3), pages 353-378, June.
    11. Alan S. Blinder & Louis J. Maccini, 1991. "Taking Stock: A Critical Assessment of Recent Research on Inventories," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 5(1), pages 73-96, Winter.
    12. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, American Economic Association, vol. 79(1), pages 14-31, March.
    13. Richard Cantor, 1990. "Effects of leverage on corporate investment and hiring decisions," Quarterly Review, Federal Reserve Bank of New York, Federal Reserve Bank of New York, issue Sum, pages 31-41.
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    Cited by:
    1. Larochelle-Cote, Sebastien, 2005. "Summary Of: Tariff Reduction and Employment in Canadian Manufacturing, 1988-1994," Analytical Studies Branch Research Paper Series, Statistics Canada, Analytical Studies Branch 2005259e, Statistics Canada, Analytical Studies Branch.

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