Bank liability structure and corporate employment: Evidence from a quasi-natural experiment in China

We examine how bank liability structure affects firms' hiring decisions. To identify causality, we utilize the 2014 interbank borrowing reform that has different impacts on national and regional banks as an exogenous shock. Particularly, we construct the exposure of firms to this reform and then run a difference-in-differences regression. The results show that an increase in banks' deposit funds promotes corporate employment, and the number of total employees on average increases by 4.4%. Further mechanism tests find that banks provide more loans and firms obtain more access to bank credit, confirming the credit constraints channel. Moreover, the corporate employment promotion effect is stronger when financial constraints, information disclosure quality and labor intensity are higher. In addition, firms' employee composition and average wage paid to workers do not change, while their productivity and production scale increase. Overall, our evidence highlights the active role of regulating banks' interbank borrowing in stabilizing social employment.