Financial Constraint and Corporate Employment: Evidence from the Emerging Economy

This paper investigates the impact of financial constraint on corporate employment decision during the financial crisis using Korean firm-level data. During the financial crisis, credit constrained firms need to consider reducing employees to cut down the expenses and rescue from financial distress. We find that firm-specific determinants have significant effects on the relation between credit constraint and corporate employment. The empirical results show that in case of the SMEs, high loan ratio cause high probability to reduce employees. However, loan ratio does not have a significant effect on employment decision in case of large firms. We can induce that financial burden on SMEs lead to high unemployment rate in Korea. This study will provide policy implication that stimulating micro-finance on SMEs is also important to improve employment situation.