Firm leverage and employment dynamics *

We examine the dynamic relation between firm leverage buildups and real economic activity using U.S. establishment-, firm-, and region-level data. We find that buildups in firm leverage are predictably associated with boom-bust growth cycles: employment grows in the short run but declines in the medium run. While firm leverage buildups are correlated with firm-level expansions, they continue to predict negative future employment growth if we control for firm-level expansions. Buildups in firm leverage predict a tightening of future firm-level financing constraints, and they only predict negative future employment growth if the level of firm leverage is sufficiently high, suggesting that the dynamic relation between firm leverage buildups and employment growth operates through a financial fragility channel. Our results have aggregate implications: regions with larger buildups in firm leverage experience stronger regional boom-bust growth cycles, and they perform significantly worse during national recessions. (c) 2021 Elsevier B.V. All rights reserved.