Employee Costs of 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 14, 2016
We examine how corporate bankruptcy leads to costs borne by employees, which increase costs of financial distress for firms via higher ex ante wages. We find that wages deteriorate by 10% when a firm files for bankruptcy and remain below pre-bankruptcy wages for at least six years. In addition, 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” are up to 12% of annual wages. Thus, reduced risk-sharing effects are large enough to be a first-order consideration in corporate capital structure decisions.
Number of Pages in PDF File: 60
Keywords: Bankruptcy, labor reallocation, risk sharing, costs of financial distress, capital structure
JEL Classification: G32, G33, J21, J31, J61
Date posted: June 10, 2013 ; Last revised: March 16, 2016
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