Abstract
Economic theory recognizes the importance of the firm’s balance sheet channel. This stands in stark contrast to the neoclassical theory of investment. This paper analyses the response of firms to the economic crisis in the sample of Croatian firms. Our main variables of interest are investment and employment. We estimated the OLS model that accounts for a heterogeneous response to the crisis shock of differently leveraged firms. The empirical model is augmented so that it accounts for industry and county effects. The robustness checks are performed for different dependent as well as control variables and interactions. The results strongly and robustly confirm the importance of the firm’s balance sheet channel.