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Relationship Lending and Employment Decisions in Firms’ Bad Times

Published online by Cambridge University Press:  09 September 2022

Pierluigi Murro Open the ORCID record for Pierluigi Murro [Opens in a new window] ,
Tommaso Oliviero  and
Alberto Zazzaro
Pierluigi Murro*
Affiliation:
LUISS Guido Carli University Department of Business and Management
Tommaso Oliviero
Affiliation:
University of Naples Federico II Department of Economics and Statistics [email protected]
Alberto Zazzaro
Affiliation:
University of Naples Federico II Department of Economics and Statistics [email protected]
*
[email protected] (corresponding author)
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Abstract

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Using firm-level survey information, we investigate whether relationship lending affects firms’ employment decisions in the face of negative sales shock. We find that firms with a durable relationship with their main bank display significantly less employment growth sensitivity to such shocks, especially where these are transitory. The result is stronger for younger and smaller firms that benefit from tighter bank-firm relationships, and for firms in sectors or economic environments where the costs of employment adjustment are greater. Our findings indicate that relationship lending provides liquidity insurance to firms to meet their demand for labor hoarding.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 58 , Issue 6 , September 2023 , pp. 2657 - 2691
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (https://creativecommons.org/licenses/by/4.0), which permits unrestricted re-use, distribution and reproduction, provided the original article is properly cited.
Copyright
© The Author(s), 2022. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

We thank Daniel Carvalho (the referee), Jarrad Harford (the editor), Sotirios Kokas, Raffaele Oriani, Lorenzo Pandolfi, Francesco Sobbrio, and Emanuele Tarantino, and participants at the ADEIMF Conference 2020, at the 2nd annual conference of the CoPFiR (2019), at the workshop on Financial Fragmentation and Challenges for SMEs’ Financing at the Essex Business School (2019), and at the seminar at LUISS University (2019) for helpful comments.

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