The Employment Effects of Credit Market Disruptions: Firm-level Evidence from the 2008–9 Financial Crisis *

Abstract

This article investigates the effect of bank lending frictions on employment outcomes. I construct a new data set that combines information on banking relationships and employment at 2,000 nonfinancial firms during the 2008–9 crisis. The article first verifies empirically the importance of banking relationships, which imply a cost to borrowers who switch lenders. I then use the dispersion in lender health following the Lehman crisis as a source of exogenous variation in the availability of credit to borrowers. I find that credit matters. Firms that had precrisis relationships with less healthy lenders had a lower likelihood of obtaining a loan following the Lehman bankruptcy, paid a higher interest rate if they did borrow, and reduced employment by more compared to precrisis clients of healthier lenders. Consistent with frictions deriving from asymmetric information, the effects vary by firm type. Lender health has an economically and statistically significant effect on employment at small and medium firms, but the data cannot reject the hypothesis of no effect at the largest or most transparent firms. Abstracting from general equilibrium effects, I find that the withdrawal of credit accounts for between one-third and one-half of the employment decline at small and medium firms in the sample in the year following the Lehman bankruptcy.

When Credit Dries Up: Job Losses in the Great Recession

“…This specification leads to an estimated employment effect of 6.2 pp (fifth column), which is identical to the baseline, confirming that REI exposure drives weak-bank troubles. 10 Lastly, we estimate the effect only for surviving firms. The estimated job loss for treated firms is equal to 1.3 pp, which is significantly lower than for the full sample.…”

Concentrated Capital Losses and the Pricing of Corporate Credit Risk

“…7 For a related application in the banking literature, see the "within-firm" estimator applied by Khwaja and Mian (2008) or Chodorow-Reich (2014).…”

Spare tire? Stock markets, banking crises, and economic recoveries

“…Pagano and Volpin (2008) and Beck et al (2010) stress that well-developed financial systems encourage employment growth, and Chodorow-Reich (2014) shows that the deterioration of a bank has adverse effects on employment by its client firms. However, deeper financial systems might increase employment risk and volatility by forcing inefficient firms to shut down or restructure (Atanassov and Kim, 2009).…”