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Empirical research regarding the determinants of employment at a …rm level is limited. One of the …rst contributions in this domain belongs to Nickell and Wadhwani (1991). The authors develop an employment model in the presence of bargaining and wages’e¢ ciency. They explore whether insider and outsider forces are relevant to determine wage (Graa‡and and Lever, 1996). The authors classify insider forces based on prices and productivity and measure outsider determinants as unemployment and alternative wages. Using a sample of 219 quoted U.K. manufacturing …rms over the period 1972-1982, the authors employ a …rst

di¤erence GMM estimator. Nickell and Wadhwani (1991) demonstrate that employment is negatively related to …rms’own wage and that it decreases with the …rms’leverage ratio. Sharpe (1994) investigates …rms’…nancial structure on the cyclicality of their employ- ment policies. The author estimates pooled regressions using 2,192 manufacturing U.S. …rms on annual net sales, number of employees, …rms’size and leverage. Firstly, to avoid problems of endogeneity, the author employs macroeconomic variables (i.e. consumer price index, in‡ation rate, ratios of sales and growth). Sharpe (1994) considers that employ- ment growth and sales are interrelated since changes in employment a¤ect the level of sales. As such, the use of macroeconomic variables allows the separation of …rms’size and leverage on unexpected shock to …rms’ demand (Basset et al., 2010). Secondly, Sharpe (1994) groups industries according to the historical covariance between their sales and the Gross National Product Average (GNP). The set of high covariance industries includes all the durable goods industries (Campello, 2003). The empirical …ndings show a signi…cant relation between …rms’leverage and the cyclicality of …rms’workforce. The results indi- cate that although leverage increases …rms’employment sensitivity, the in‡uence on sales is higher for …rms producing durable goods. Small …rms quickly lay o¤ workers during a recession. Sharpe (1994) attributes the results to the existence of hiring and training costs. The costs induce healthy …rms to save labour whilst small …rms are willing to adjust their workforce more since they face higher opportunity costs of capital.

Nickell and Nicolitsas (1999) investigate the impact of …nancial pressure on …rms’be- haviour in the form of employment decisions, wage settlements and productivity growth. Using an unbalanced panel model of 670 manufacturing U.K. listed …rms, the authors

employ a labour demand equation from a quadratic adjustment cost model.12 _{The model}

follows a standard production function. Firms’output is a function of employment, capital and a multiplicative technological factor. Sharpe (1994) obtain a reduce form of the em- ployment demand equation which stands as the basic equation of their empirical analysis. The impact of …nancial pressure is measured by the ratio of interest payments to cash ‡ow (i.e. borrowing ratio) and a Treasury Bill yield. In order to avoid endogeneity problems, the authors use a set of instruments for the …nancial determinants. Speci…cally, they use the borrowing ratio two or three years lag and the Treasury Bill yield to ensure that both …nancial variables are uncorrelated with current employment shocks. Exogenous variables (i.e. short term demand, price and cost expectations) are included in the employment

equation.13 _{The labour demand equation is employed with the …rst-di¤erence GMM esti-}

mator by Arellano and Bond (1991). The empirical results indicate that …nancial pressure has a negative impact on employment, wages and a positive impact on productivity. Nick- 12_{Note that in the standard quadratic adjustment cost model,Nickell and Nicolitsas (1999) create a log}

approximation of a standard quadratic model. In their model, the employment of year t depends on the previous employment level. All the future levels of desired employment are adjusted by a discount factor.

ell and Nicolitsas (1999) also divided the sample in two equal size groups (i.e. above and below the median) for the average employment, ratio of dividends to assets and the ratio of debt to capital stock. The results suggest that there is no di¤erence between small and large …rms regarding the e¤ect of the borrowing ratio. The same outcome is obtained for higher and lower dividend …rms.

After the publication of Nickell and Nicolitsas (1999) a number of studies provide em- pirical support on how …nancial pressure a¤ects …rms’employment decisions. For instance, Benito and Young (2007) investigate …rms’…nancial pressure through the level of dividend payments, propensity to issue new equity and rates of investment. Their empirical strat- egy is to examine the role of dividends, investment and the use of new equity …nance as functions of …rms’ …nancial characteristics. Firstly, to develop a dividend equation, the authors follow Bond et al. (1996). Benito and Young (2007) consider a model in which

dividends are normalised by …rms’ sales and capital stock.14 _{Secondly, the investment}

equation is based on Blundell et al. (1992) and includes a …nancial pressure (i.e. the bor-

rowing ratio).15 _{Benito and Young (2007) use a panel of U.K. listed …rms between 1980}

and 1998 and employ a dynamic GMM estimator. The authors …nd a negative relation between dividends and cash ‡ow. Results also show a negatively in‡uence of dividends on investment rates and the level of indebtedness. Firms more likely to issue equity present lower levels of cash and high levels of investment and debt. Benito and Young (2007) refer that the results indicate the in‡uence of debt-servicing costs on dividend payments and investment expenditures.

Drawing on the work by Nickell and Nicolitsas (1999), Benito and Hernando (2008) ob- tain the same empirical …ndings as in Nickell and Nicolitsas (1999) but for Spanish …rms. The authors use the labour demand equation derived by Nickell and Nicolitsas (1999) also employing …nancial factors. The model of Benito and Hernando (2008) di¤ers from the one of Nickell and Nicolitsas (1999). Firstly, the authors consider as …nancial variables not only borrowing ratio but also cash ‡ow, liquidity and net indebtedness. Secondly, they consider a demand shock proxy measured as the growth in log of real sales. Using a panel model over the period 1985-2001, they employ the labour demand equation with a system GMM estimator proposed by Arellano and Bover (1995). This method considers the estimator with the level equations together with Arellano and Bond (1991) usual lag di¤erences (Baum, 2001). Consistent with the previous empirical …ndings by Nickell and Nicolitsas (1999), the borrowing ratio has a signi…cant and negative in‡uence on employ- 14_{Bond et al. (1996) explore the behaviour of a sample of 1,218 U.K. industrial and commercial …rms in}

order to verify if the presence of surplus advance corporate tax (ACT) in‡uences …rms’dividend payments. As such, their regression model relates dividends to pro…ts and …rm size and both dividends and pro…ts are divided by total sales in order to compare measures between small and large …rms.

15_{Blundell et al. (1992) estimate a Q model of investment. The measurement error in the average}

Tobin’s Q is corrected when it is serial uncorrelated by using lagged values of average Q as instrumental variables.

ment. The results suggest that the borrowing ratio a¤ects …rms’ …nancial constraints, and therefore, has an impact on labour demand. Benito and Hernando (2008) do not …nd a signi…cant in‡uence of liquidity, cash ‡ow and net indebtedness on Spanish …rms’ employment. Regarding the demand for ‡exible and rigid labour, the authors show that temporary employment is more volatile for Spanish manufacturing …rms and permanent labour contracts are una¤ected by …nancial factors.

In a complementary paper, Caggese and Cuñat (2008) explore how hiring and …ring cost are related with …nancial constraints and in‡uence …rms’employment policies. They use a sample of small and medium Italian manufacturing …rms for the period 1995-2000. The model considers the impact of …nancial constraints on employment decisions, …xed- term and permanent employment. The regression model uses a qualitative measure of …nancial constrains which is based on a survey to …rms . The authors use capital and sales as control variables in all regressions. Results indicate that …xed-term contracts are used more intensively by …nancially constrained …rms. Financially constrained …rms also present a higher volatility of total employment comparing with the unconstrained ones. Fixed-term contracts are more volatile than permanent contracts. The authors conclude that …nancial market imperfections denote an increase in expected …ring cost which makes permanent contracts implicitly more expensive.

Recently, Chen and Guariglia (2009) investigate whether …nancial factors have an im- pact on …rms’level of employment. The authors use a sample of 16,000 Chinese manufac- turing …rms over the period of 2000 to 2005. Chen and Guariglia (2009) follow the model of employment by Nickell and Nicolitsas (1999) and use six …nancial factors (i.e. cash ‡ow, interest burden, collateral, leverage, interest coverage and borrowing ratios). The system GMM approach is employed. The sample is de…ned in two ways. First, the authors split …rms according to their ownership (i.e. …rms owned by the state, foreign investors, collective and private investors). Secondly, …rms’are divided by their geographic location (i.e. east, central and west). Chen and Guariglia (2009) refer that di¤erent ownerships can be associated with di¤erent pension schemes and bene…ts. This can a¤ect …rms’ labour costs. Furthermore, …rms’location can also have an impact on the level of employment. Labour regulations may be di¤erent across the regions. The empirical results indicate that the six …nancial factors in‡uence …rms’level of employment. In particular, Chen and Guariglia (2009) refer that the debt-servicing costs ratios (i.e. interest burden, borrowing and coverage ratio) have a negative impact on the level of employment. This is consistent with the role of economic ‡uctuations by the monetary policy channel. In terms of …rms’ ownership, the empirical …ndings suggest that interest burden is not signi…cant for any of the sample ownership categories. However, the authors show that the level of employment for foreign owned …rms is negatively related to cash ‡ow and leverage. Collective …rms increase their level of employment with their leverage and private …rms show a positive

relation with collateral, cash ‡ow, borrowing and coverage ratio. Eastern …rms reduce their level of employment with an increase of the coverage ratio and collateral. Interest burden has also a negative in‡uence on central …rms’level of employment. Finally, all the …nancial factors are not signi…cant for western …rms.