Labor and finance: the effect of bank relationships

We investigate whether and how firms’ number of bank relationships affects labor market outcomes. We base our analysis on more than 5 million observations on matched credit and labor data from Brazilian firms during 2005-2014. We find that firms with more bank relationships employ significantly more workers and pay significantly higher wages. Moreover, increases (decreases) in the number of bank relationships result in positive (negative) effects on employment and wages. These results are robust for strictly exogenous changes in the number of bank relationships due to nationwide bank M&A activity, when using instrumental variable regressions, and are independent of firm size. The effects are due (but not limited) to higher credit availability, lower cost of credit and higher heterogeneity in firms’ bank relationships. Importantly, the firm-level results consistently translate into positive macroeconomic effects at the municipality and state levels. The evidence is novel and suggests positive effects of multiple bank relationships on labor market outcomes in an emerging economy.