Finance and Work - Panunzi

Team Members

Laura Bottazzi              (Università degli Studi di Bologna)
Veronica Guerrieri       (University of Chicago)

This research unit is part of the project Finance and Work, which consists of 5 Research Units coordinated by Fabiano Schivardi (Università degli Studi di Cagliari).

Abstract
We investigate the interactions between capital markets and the protection provided to its stakeholders. In particular, we will address two main questions.

1. Which is the role of firms' financial structure in explaining the employment effect of a credit crunch? Is it true in the data that firms’ employment decisions respond to shocks to the financial system? And if this is the case, what is really the mechanism behind this response?

There is a large literature that aims to evaluate the impact of a tightening in financial constraints on investment. We intend to focus on the impact on employment. If employment is affected by financial frictions, we expect firms that are financed by financial institutions that faced difficulties during the crisis to reduce their employment level more than the others, controlling for a series of observables. We also want to explore the role of different capital structure (long-term vs short-term debt, etc) in explaining difference in employment responses to better understand the real mechanism at work.

We conjecture that firm capital structure affects firms reaction to the credit crunch. In particularm since firms employing workers with specific human capital have more conservative capital structure and hold more liquid assets, they will be less affected by the decrease in borrowing capacity in the short run.

The Bocconi research unit of the PRIN grant will develop a theoretical model on these issues to derive empirically testable predictions to be brought to the data.

2. What is the impact of employment protection on firms' financial structure?

We will investigate the consequences of a rigid labor market on the capital structure and on the type of securities issued. One plausible conjecture is that firms should issue more equity when they have a rigid cost structure due to the inability to reduce employment during downturns. By the same logic, we should expect firms with a rigid cost structure relying more on debt easy to renegotiate, such as bank debt, rather than on dispersed debt.

The Bocconi research unit of the PRIN grant will develop a theoretical model on these issues to derive empirically testable predictions to be brought to the data.