Loughborough University. Department of Economics. Discussion Paper Series;WP 2008-02
This paper investigates the nexus between ﬁnancial factors and the capital-labour ratio using a rich ﬁrm-level data set. It is common in the literature to examine the impact of ﬁnancial constraints on hiring and ﬁring decisions separately from their impact on decisions related to investment in physical capital. We argue that as long as ﬁrms use both inputs in production and there is some substitutability between them, the two decisions need to be jointly analyzed. When we diﬀerentiate across ﬁrms that are more or less ﬁnancially constrained, we ﬁnd that the former group exhibits higher sensitivities of the capital-labour ratio to ﬁrm-speciﬁc characteristics, compared to the latter.
This working paper is also available at: http://ideas.repec.org/p/lbo/lbowps/2008-02.html