Firms’ Capital Structure and Employment in the Aftermath of the 2008-9 Financial Crisis

Empirical literature documenting the real costs of financial crises links the surge of unemployment to mainly bank frictions. This paper takes a more comprehensive approach by looking at how bank credit constraints, firm’s capital structure and inputs characteristics interact in shaping the firms’s response. We document that both the firm’s ability to substitute bank with trade credit and the characteristics of the inputs transacted along the supply chain matter in shaping the labor market reaction of Italian corporations to the unfolding of the 2008-9 financial crisis. As bank lending conditions tightened, firms intensively increasing their reliance on trade credit managed to partly mitigate their employment contraction but faced a stronger input bias against labor. Manufacturing firms largely using trade credit to buy differentiated inputs experienced a smaller drop in employment but a stronger input bias than firms buying standardized inputs. Finally, while the labor market recovered quite fast for firms increasing their reliance on trade credit, with the number of employees reaching the pre-crisis level around 2016, the shift toward technologies less intensive in labor showed more persistence, with the input bias even sharpening during 2013-14 and being in 2019 still 6 percentage points higher than the initial 2008 value.