Financial conservatism fosters job creation during economic crises

ABSTRACT

This article aims to analyse the phenomenon of financial conservatism in firms’ capital structures and relate it to their employment variation for a sample of Spanish companies during the 2008–2013 period, characterized by a sharp crisis and very high unemployment rates. Financial conservatism is described as following a low-leverage/high cash no-short-term capital structure policy. We use the noisy selection model that relates growth, age, and size, to which we add a dummy indicating financial conservatism. As the growth of a company is measured as its number of employees’ variation, we are ultimately analysing how financial conservatism affects job creation. The objective of this work is to stress the advantages of a financially conservative policy as the evidence shows that such a policy at a given enterprise is a positive factor for job creation, which in Macroeconomics terms means an improvement in economy’s employment. The average conservative company more likely to foster job creation is a small company belonging to the industry or services sector.

KEYWORDS:

• Financial conservatism
• capital structure
• growth
• unemployment
• crisis

JEL CLASSIFICATION:

• J23
• O16
• G32

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ This elimination is common in all capital structure studies; see for example Frank and Goyal (2003). These companies are significantly different in terms of legislation or accounting.

² We do not use the number of employees to construct the size variable in order to limit endogeneity, which is a problematic issue as we shall see in the Methodology section.

³ We thus measure the ratio on 31 December of the previous year. The consequences of a company being conservative in year t are evident in year t + 1 (that is, you cannot expect a company to use its surplus debt capacity to grow in year t if it is forced to be conservative by 31 December of that same year). Henceforth, when we say a company is conservative in the year t and year t-1, we always mean that it is in the lowest quintile of indebtedness less cash as of the end of year t-1 and t-2, respectively.

⁴ An industry-adjusted variable is calculated as the value of that variable minus the mean of that variable for that year for companies in the same industry at the two-digit level of the NCEA (National Classification of Economic Activities).

⁵ Since the variable change in the number of employees is an important variable in this work and in order to facilitate its reading is presented in Table 2 both defined computed with natural logs, as defined in the model, and alternatively as the change of the number of employees, in which Logarithms have not been taken. The same is done with the variable size and age.

⁶ The value of job creation is calculated for the sample mean of the size variable.

⁷ Deeper disaggregation was not possible due to the low number of observations for some of the subsectors.

Additional information

Funding

This work was supported by Fundación CajaMurcia and the Spanish Government under [RTI2018-093884-B-I00] Grant. Fundación Cajamurcia Project [FEM2013-40578-P] financed by the Ministerio de Economía y Competitividad.