Credit Constraints and Job Destruction : Evidence from Denmark

During the financial crisis, credit was reduced for many firms, and employment decreased everywhere and in most sectors. In this paper, we test whether there is a link between the financial system and job destruction through a decline in credit availability. We construct a new data set that combines firm-level information and bank-level information, and to establish causality, we exploit the exogenous variation in banks' loan supply induced by injunctions from the financial regulator to increase solvency. Using information on almost 15,000 Danish firms over the 2010 to 2015 period, we find that injunctions have a serious negative impact on the amount of firm-level debt. We further find that firms do not substitute the lost bank financing with equity; instead, they scale down their activities and lower their wage costs. We also find that larger banks are more likely to transmit the effect of an injunction to their smaller customers (by constraining credit), whereas smaller banks are more likely to shield their corporate customers irrespective of size