Financial constraints and firm employment: Evidence from Turkey

Abstract

We examine the effect of financial constraints on firms' employment growth. We use the maturing debt approach which uses the fact that the amount of long term credit maturing in a particular year can be considered as an exogenous financial constraint on firms’ employment decision in that year. Our findings reveal that financing constraints have an adverse impact on employment creation in Turkey. Moreover, we show that there is a strong heterogeneity with respect to size for the finance-employment relation. Maturing long-term debt existence reduces employment growth in small firms while there is no significant impact on large firms. Our results also imply that the phase of business cycle matters on the finance-employment relation; credit constraints bind employment growth only in the period of financial turmoil.