The Reallocative 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
October 28, 2015
This paper examines how bankruptcy by a firm leads to costs borne by its employees due to reallocation of the workforce. Using worker-firm matched data from the U.S. Census Bureau’s LEHD program, we demonstrate that annual wages deteriorate by about 10% upon corporate bankruptcy and remain below pre-bankruptcy wages for (at least) six years. In addition, when a firm files for bankruptcy, its employees are significantly more likely to work fewer hours, leave the firm, leave the industry, and leave the local labor market, relative to employees of solvent firms with similar characteristics. Wage losses are larger for individuals who leave the firm, the industry, and the local labor market, and for those in “thinner” local labor markets. We show that the ex-ante wage premium that firms must pay to compensate for the expected wage loss due to bankruptcy is up to half of the magnitude of the tax benefits of debt. This result suggests that indirect bankruptcy costs due to workforce reallocation are of a magnitude to be a first-order consideration for firms as they make capital structure choices.
Number of Pages in PDF File: 61
Keywords: Worker reallocation, bankruptcy, costs of financial distress, capital structure
JEL Classification: G32, G33, J21, J31, J61
Date posted: June 10, 2013 ; Last revised: November 5, 2015
© 2015 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo2 in 0.344 seconds