One of the dominant narratives of the Great Recession is the important role of U.S. household debt in the intensity and duration of the economic contraction between the end of 2007 and the middle of 2009, and the subsequent slow recovery. Research by Atif Mian of Princeton University and Amir Sufi of the University of Chicago documents the critical role of accumulating mortgage debt by U.S. households in the subsequent massive pull back in consumption once house prices started to collapse in 2006 and 2007.

Yet U.S. households weren’t the only economic actors adding debt in the years leading up to the Great Recession. New research by Xavier Giroud of the Massachusetts Institute of Technology’s Sloan School of Management and Holger Mueller of the Stern School of Business at New York University shows that the financial leverage of companies was also instrumental to the length and severity of the sharp economic contraction. The new paper , argues that while household debt, as emphasized by Mian and Sufi, is very important to understanding the last recession, the balance sheets of employers were central to the economic downturn as well. As Giroud and Muelle put it, “households do not lay off workers. Firms do.”

The two authors find that the way households responded to the collapse in housing prices mattered, but only in so much as it affected companies as the consumers of their products and services pulled back on consumption. But how that enduring decline in consumer spending affected the large economy through employment trends depends on how firms reacted to this decline. Giroud and Mueller examined that link by looking at the changes in employment by establishment between 2007 and 2009. (A quick reminder: an establishment is a physical location where business is done and a firm can have one or more establishment.)

In short, they find that the establishments of firms that increased their debt load during the years prior to the Great Recession responded to the economic downturn by firing more workers compared to the establishments of low-leveraged firms. The response was so different between the highly indebted firms’ establishments and the more frugal ones that all of the jobs lost due to the collapse in housing prices were at high-leverage firms’ establishments. Furthermore, the communities around the nation with more establishments of high-leveraged firms saw higher employment losses.

One way to interpret Giroud and Mueller’s findings are that these more indebted firms couldn’t access credit during the recession so their only choice in responding to the pull back in consumption was to fire workers. In other words, the tightening of credit markets during the Great Recession played a role to in the large-scale employment losses at the time.

But why did these firms take on so much debt? The authors are silent on that issue, but there are potential reasons for this build-up: leveraged buyouts, share buybacks, or debt-heavy mergers and acquisitions. They could be the reason many firms were unprepared to weather the large shock when it arrived.

A potential lesson to be drawn from this new paper is that the effects of household debt and the tightening of credit markets are more intertwined than economists and policymakers usually consider. The bursting of the housing bubble might have been the primary driver in starting the sequence of events that resulted in the Great Recession, but the credit markets and the balance sheets of firms played an important role in disseminating that huge shock. The role of debt writ large in our economy is quite important after all.