Firms' Financial Policy and Labour Demand: Theory and Evidence.

This paper investigates the influence of financial leverage on firms' intertemporal hiring decisions in the context of the hierarchy of finance approach to coporate finance. We derive the Euler equation of employment in the presence of convex adjustment costs, and show the empirical implications of firms facing a hierarchy of financial costs. A linearised version of the model is estimated on a large panel of Swedish manufacturing firms over the period 1979-88.