On the Real Effect of Financial Pressure: Evidence From Firm‐Level Employment During the Euro‐Area Crisis
| Author | Filipa Da Silva Fernandes,Alexandros Kontonikas,Serafeim Tsoukas |
| Published date | 01 June 2019 |
| Date | 01 June 2019 |
| DOI | http://doi.org/10.1111/obes.12278 |
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©2018 The Department of Economics, University of Oxford and JohnWiley & Sons Ltd.
OXFORD BULLETIN OF ECONOMICSAND STATISTICS, 81, 3 (2019) 0305–9049
doi: 10.1111/obes.12278
On the Real Effect of Financial Pressure: Evidence
From Firm-Level Employment During the Euro-Area
Crisis*
Filipa Da Silva Fernandes,*Alexandros Kontonikas† and
Serafeim Tsoukas‡
*University of Aberdeen, Business School, Aberdeen, AB24 3QY, UK
(email: filipaalexandra.dasilvafernandes@abdn.ac.uk)
†University of Essex, Essex Business School, Colchester, C04 3SQ, UK
(email: a.kontonikas@essex.ac.uk)
‡University of Glasgow, Adam Smith Business School, Glasgow, G12 8QQ, UK
(email: serafeim.tsoukas@glasgow.ac.uk)
Abstract
Using a large panel of mainly unquoted euro-area firms over the period 2003–2011, this
paper examines the impact of financial pressure on firms’ employment.The analysis finds
evidence that financial pressure negativelyaffects firms’ employment decisions.This effect
is stronger during the euro area-crisis (2010–2011), especially for firms in the periphery
compared to their counterparts in non-periphery European economies. When we introduce
firm-level heterogeneity, weshow that financial pressure appears to be both statistically and
quantitativelymore impor tant for bank-dependent, small and privately held firms operating
in periphery economies during the crisis.
I. Introduction
The magnitude of the global financial crisis that commenced in late 2007 was exceptional
when compared to previous episodes of financial distress.At its core, it was a banking crisis
highlighting the important links between financial conditions and the real economy (Iyer
et al., 2014). In the euro area, following a period of convergenceprior to the crisis, financial
market fragmentation intensified and periphery-based firms, especially smaller ones, faced
major problems in accessing external finance.1Early 2010 witnessed the transformation of
JEL Classification numbers: G32; D22; E22; E44 .
*Weare grateful to Francesco Zanetti (Editor) and three anonymous referees for useful comments and suggestions.
We also thank Nikos Giannakopoulos, Sotirios Kokas and participants at the Financial Engineering and Banking
Society 2014 Conference; the UECE 2014 Conference on Economic and Financial Adjustments; the Annual 2014
Conference of Money Macro and Finance; the Financial Management Association European 2015 Conference;
the Financial Management Association Annual Meeting 2015; the University of Sussex; the Vienna University of
Economic and Business; and the University of Gent for comments received on an earlier draft of this paper.Any
remaining errors are our own.
1ECB policymakers frequently highlighted the negative effects of financial fragmentation.The rise in euro-area
financial fragmentation along core and periphery lines is well-documented in the existing literature. See, for instance,
618 Bulletin
the global financial crisis into a sovereign debt crisis in the euro area.2The crisis originated
in Greece but gradually spread to other periphery economies. With their government bond
yields soaring, and following a series of credit rating downgrades, Greece, Ireland and
Portugal were forced in 2010–2011 to resort to bailout schemes organized by the European
Union, the European Central Bank (ECB) and the International Monetary Fund. Moreover,
in the second half of 2011, Spanish and Italian government bonds came under significant
market pressure. Given the important connection between sovereign and banking sector
credit-worthiness (Acharya and Steffen, 2015), banks in the euro-area periphery faced
severe stress levels and responded by shedding assets.3In Europe, financial pressure, as
measured by the ratio of corporate interest payments relativeto cash flow, rose as the global
financial crisis began in 2008, and remained at high levels until 2012 (Benito, 2017). This
suggests that financial pressure was particularly severe during the global financial crisis,
and the ensuing sovereign debt crisis reflected elevated interest rate expenses.
The present paper aims to provide new evidence on how employment responds to fi-
nancial pressure, focusing on the euro-area. More specifically,we investigate the following
new questions. Has firms’employment reacted to financial pressure during the recent Euro-
pean sovereign debt crisis? Has financial pressure had differing effects on firms operating
in periphery euro-area economies (such as Italy, Spain, Portugal, and Ireland) compared
to their counterparts in the core euro-area economies? Is the link between employment
decisions and financial pressure more potent for financially constrained firms compared
to unconstrained firms? To answer the above questions, we capture the effect of financial
pressure using a firm-specific interest rate variable, the so-called interest burden. There is
evidence suggesting that employment, as well as other company decisions, such as invest-
ment and dividend payments, are sensitiveto financial pressure (see Nickell and Nicolitsas,
1999; Benito, 2005; Benito and Young,2007; Benito and Her nando, 2008).Yet these stud-
ies do not extend to the recent sovereign debt crisis, and use single-country datasets, which
makes it difficult to draw conclusions about the euro area as a whole, or to obtain crisp
comparisons on the experience of periphery vs. non-periphery countries.
Our study is motivated by the recent developments in the euro area, but there is also
theoretical rationale for expecting an effect of financial pressure on employment. Firms
typically require some external finance, from either banks or financial markets, to pursue
investment projects, and this is available subject to minimum standards of creditworthiness
in the eyes of the lender.Theoretical models, reviewedin Section II, suggest that the cost and
availabilityof external finance can affect firm-level employment through several channels.4
Mayordomoet al. (2015) for evidence on interbank money markets, and Rughoo and Sarantis (2014) for retail banking
deposit and lending rates.
2Several studies highlight the role of the banking risk in transforming the global financial crisis into the sovereign
debt crisis, and the nexus between banking risk and sovereignrisk. See, among others, Alter and Sch ¨uler (2012), De
Bruyckere et al. (2013), Acharya, Drechsler and Schnabl (2014), Delatte, Fouquau and Portes (2017) andAfonso
et al. (2018).
3As Acharya and Steffen (2015) highlight, in 2011 only, European banks on average lost 40% of their market
value and shed billions of euros in assets in order to raise regulatory capital ratios.
4Recent studies using structural models show that there is a strong link between financial frictions and labour
market performance. For instance, Mumtaz and Zanetti (2015) provide evidence that shocks to technology and the
job separation rate are key factors in explaining adjustment costs. Jermann and Quadrini (2012) find that financial
shocks affect US firms’capacity to bor row,as firms’ financial conditions to borrow tightened during 2008. Similarly,
Mumtaz and Zanetti (2016) show that the link between financial frictions and the labour market becomes more
©2018 The Department of Economics, University of Oxford and JohnWiley & Sons Ltd
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