Abstract

http://ssrn.com/abstract=2276753
 
 

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Employee Costs of Corporate Bankruptcy


John R. Graham


Duke University; National Bureau of Economic Research (NBER)

Hyunseob Kim


Cornell University - Samuel Curtis Johnson Graduate School of Management

Si Li


Wilfrid Laurier University - School of Business & Economics

Jiaping Qiu


McMaster University - Michael G. DeGroote School of Business

June 14, 2016


Abstract:     
We show that corporate bankruptcy leads to a significant reduction in employee earnings, which in turn increases financial distress costs for firms via higher ex ante wages. Annual employee earnings deteriorate by 10% when a firm files for bankruptcy and remain below pre-bankruptcy earnings for at least six years. Affected employees are likely to work fewer hours and leave the firm, industry, and local labor market. We estimate that compensating wage differentials for this “bankruptcy risk” increase the present value of ex ante wages paid by the firm by up to 12% of annual wages. Overall, this paper shows that bankruptcy risk reduces risk-sharing between the firm and workers, and the resulting additional labor costs are large enough to be a first-order consideration in corporate capital structure decisions.

Number of Pages in PDF File: 62

Keywords: Bankruptcy, labor reallocation, risk sharing, costs of financial distress, capital structure, worker-firm matched data

JEL Classification: G32, G33, J21, J31, J61


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Date posted: June 10, 2013 ; Last revised: June 15, 2016

Suggested Citation

Graham, John R. and Kim, Hyunseob and Li, Si and Qiu, Jiaping, Employee Costs of Corporate Bankruptcy (June 14, 2016). Available at SSRN: http://ssrn.com/abstract=2276753 or http://dx.doi.org/10.2139/ssrn.2276753

Contact Information

John Robert Graham
Duke University ( email )
Box 90120
Durham, NC 27708-0120
United States
919-660-7857 (Phone)
919-660-8030 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Hyunseob Kim (Contact Author)
Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )
Ithaca, NY 14853
United States

Si Li
Wilfrid Laurier University - School of Business & Economics ( email )
Waterloo, Ontario N2L 3C5
Canada
Jiaping Qiu
McMaster University - Michael G. DeGroote School of Business ( email )
1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada
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