Refinancing Constraints and Labor Hiring: The Role of Financial Reporting Quality

Abstract

Recent studies highlight the adverse effect of financing frictions on corporate employment. In this paper, we hypothesize and find that high quality financial reporting mitigates the negative effect of refinancing constraints on firms’ labor hiring, where refinancing constraints are identified by significant levels of maturing long-term debt. We further find that financial reporting quality facilitates firms’ hiring activities by mitigating the adverse effect of refinancing constraints on new debt issuance. In addition, we show that the mitigating role of financial reporting quality in the negative relation between refinancing constraints and corporate employment decisions is more pronounced for financially constrained firms and for labor-intense firms. Overall, our study contributes new evidence on the role of high quality financial reporting in facilitating firms’ abilities to maintain and expand their labor forces, particularly when facing significant refinancing constraints.