Debt Financing and Labor Employment in China: An Inverted U-Shaped Relationship

ABSTRACT

This study examines whether debt financing affects firm labor employment. Using Chinese listed companies between 2007 and 2021, we identify an inverted U-shaped relationship between debt financing and labor employment. Increased debt financing tends to boost labor employment. However, this positive influence gradually diminishes until a critical point is reached and the relationship turns negative thereafter, suggesting that there is a best balance between debt financing and labor employment. This inverted U-shaped association is also influenced by firm profitability and financial risk, with the former steepening the relationship and the latter making it smoother. Moreover, the impact of debt financing on labor employment is more pronounced in large firms, non-state-owned enterprises, labor-intensive companies, and firms with high solvency. Our findings imply that companies can effectively harness the positive effects of debt financing on labor employment by strategically adjusting their capital and labor resources.

KEYWORDS:

• Debt
• labor employment
• firm profitability
• financial risk
• non-linear

JEL:

• G31
• G32
• J21
• J23

Disclosure Statement

No potential conflict of interest was reported by the author(s).

Additional information

Funding

This work was supported by the National Social Science Foundation of China [18BJY236].