We examine the employment decisions of Spanish manufacturing firms in financial distress. Our sample comprises 4,566 firms operating during 1983-1994. We find that firms in distress reduce their employment significantly. These reductions are positively associated with asset sales, but cannot be fully explained by them. They are also negatively related to firm size and to firing costs. Our main finding, however, is that firms that restructure their debt in response to distress are more likely to reduce their employment. Employment falls as the firm's debt exposure is reduced, but also as a consequence of a bank debt restructuring involving exclusively an extension of maturity. These empirical findings provide a clear-cut quantitative illustration of the agency costs of debt emerging from stockholder-bondholder conflicts.
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