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Firm financing and the relative demand for labor and capital

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  • ElFayoumi, Khalid

Abstract

Using more than one million firm-year observations of small and medium European firms between 2003 and 2019, this paper introduces new stylized facts on how firms' relative demand for labor and capital evolved as their capital structure adjusted to the events of the 2008 crisis. It also provides micro-level evidence that firms substitute capital for labor when financing costs rise. The empirical evidence lends support to the hypothesis that substitution is driven by an incentive to raise holdings of collateralizable capital. Identification of exogenous variations in firm financing costs relies on the heterogeneous effects of ECB monetary policy surprises on financing costs across the firm distribution.

Suggested Citation

  • ElFayoumi, Khalid, 2024. "Firm financing and the relative demand for labor and capital," Journal of Economic Dynamics and Control, Elsevier, vol. 168(C).
    • Handle: RePEc:eee:dyncon:v:168:y:2024:i:c:s0165188924001386
    DOI: 10.1016/j.jedc.2024.104946
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    Keywords

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    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • G3 - Financial Economics - - Corporate Finance and Governance
    • J2 - Labor and Demographic Economics - - Demand and Supply of Labor
    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs

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