Debt, labor markets, and the creation and destruction of firms

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AuthorsAlmazan, A., De Motta, A., and Titman, S.ac  

 PublicationJournal of Financial Economics, Vol. 118, No. 3, 2015

Abstract
We analyze the financing and liquidation decisions of firms that face a labor market with search frictions. By inducing bankruptcy, debt can facilitate the process of creative destruction (i.e., the elimination of inefficient firms and the creation of new firms) but can also lead to excessive liquidation and unemployment in particular, during economic downturns. Within this setting, we examine policy interventions that influence the firms financing and liquidation choices. We consider the role of monetary policy, which can reduce debt burdens during economy-wide downturns, and tax policy, which can influence the incentives of firms to use debt financing. 

Read full article: Journal of Financial Economics, December 2015