Corporate Real Assets and Employment Decisions

Abstract

I empirically examine the impact of corporate unencumbered real assets on employment decisions in the context of a labor hoarding model of employment under credit constraints. The labor hoarding theory suggests that in response to a negative demand shock companies might rationally hold onto more labor than is necessary to produce the desired level of output. However, such a decision to maintain a high capacity labor force during a downturn often requires funding outside of the usual cash flow. Building from the literature that suggests that highly leveraged firms are less likely to hoard labor, I examine the presence of unencumbered real assets to see if real asset’s capacity to lift credit constraints can be applied to the financial considerations necessary to support a labor force when a firm is facing distress. I find that having more unencumbered real assets decreases the probability of layoffs overall and most significantly following a negative shock to revenue.