Human Capital Loss in Corporate Bankruptcy
John R. Graham
Duke University; National Bureau of Economic Research (NBER)
Cornell University - Samuel Curtis Johnson Graduate School of Management
Wilfrid Laurier University - School of Business & Economics
McMaster University - Michael G. DeGroote School of Business
March 13, 2013
This paper quantifies the “human costs of bankruptcy” by estimating employee wage losses induced by the bankruptcy filing of employers using employee-employer matched data from the U.S. Census Bureau’s LEHD program. We find that employee wages begin to deteriorate one year prior to bankruptcy. One year after bankruptcy, the magnitude of the decline in annual wages is 30% of pre-bankruptcy wages. The decrease in wages persists (at least) for five years post-bankruptcy. The present value of wage losses summed up to five years after bankruptcy amounts to 29-49% of the average pre-bankruptcy market value of firm. Furthermore, we find that the ex-ante wage premium to compensate for the ex-post wage loss due to bankruptcy can be of similar magnitude with that of the tax benefits of debt.
Number of Pages in PDF File: 37
Keywords: Bankruptcy, costs of financial distress, human capital, wage loss, capital structure
JEL Classification: G3, G32, G33, J24, J31, J33
Date posted: June 10, 2013 ; Last revised: August 5, 2013
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