Employee Costs of Corporate Bankruptcy

62 Pages Posted: 10 Jun 2013 Last revised: 15 Jun 2016

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

Multiple version iconThere are 3 versions of this paper

Date Written: 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.

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

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

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: https://ssrn.com/abstract=2276753 or http://dx.doi.org/10.2139/ssrn.2276753

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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