We study how firms hire labour and invest in capital stock depending on their financial situation. We find that firms that are financially constrained tend to have larger employment elasticities with respect to demand, whereas financially unconstrained firms tend to hoard labour. These findings can explain the differential response of employment during different crises, where some resulted in large employment losses, whereas others did not.

We also study the role of financial fricitions for investments. Preliminary results suggest a relatively large effect (which would suggest a large amplification of business cycles).