Carlson School of Management
The financial economics literature has recently emphasized the health of the financial intermediary sector, focusing mostly on measures of intermediaries' financial leverage and collateral constraints. These resesarchers identify an alternative channel for financial intermediaries to affect risk and the real sector. They believe that the health of financial intermediaries, as measured by their labor leverage, which proxies for frictions in adjusting labor obligations, is at least as important empirically. Their measure of intermediary labor market risk forecasts the market excess return positively, and debt growth and aggregate investment negatively. In the cross-section, intermediaries with higher labor leverage give out fewer loans; firms connected to such banks invest less. The researchers are building a model in which intermediaries use labor for screening and monitoring, and where wages are sticky, to explain these findings.