Labor Reactions to Credit Deterioration: Evidence from LinkedIn Activity

Abstract

We examine workers’ reactions to signals of their firms’ credit deterioration using anonymized networking activity on LinkedIn. Connection formation significantly increases after firms are placed on negative credit watch. We document labor reactions to credit events across the entire distribution of credit ratings, and propose a human capital risk channel to explain why workers respond even when the firm is far from default. Connection activity is associated with more contemporaneous and future departures, and also significant for those that remain, consistent with a precautionary motive for networking. Furthermore, we find reactions are stronger for senior and skilled workers. Firms with stronger labor reactions to credit events also experience worse turnover and profitability, up to one year after the event.

Keywords: Network formation, Credit ratings, Credit deterioration, Labor & finance