Human Capital Loss in Corporate Bankruptcy

38 Pages Posted: 7 Aug 2013

See all articles by John R. Graham

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 4 versions of this paper

Date Written: March 1, 2013

Abstract

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.

Keywords: Bankruptcy, Costs of financial distress, Human capital, Wage loss, Capital structure

JEL Classification: G3, G32, G33, J24, J31, J33

Suggested Citation

Graham, John Robert and Kim, Hyunseob and Li, Si and Qiu, Jiaping, Human Capital Loss in Corporate Bankruptcy (March 1, 2013). Johnson School Research Paper Series No. #24-2013. Available at SSRN: https://ssrn.com/abstract=2306130 or http://dx.doi.org/10.2139/ssrn.2306130

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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