Is Corporate Credit Risk Propagated to Employees?

Abstract

As rising household debt became a widespread global phenomenon, understanding the sources of consumer credit risk has been crucial for financial and macroeconomic stability. We analyze employer-employee relationships from the perspective of banks to study the financial linkages between a firms' credit conditions and their employees' credit outcomes. We combine administrative credit registry data with the universe of labor contracts in Brazil to investigate if credit risk spills over from firms to their employees. We find that employees of credit-rating-downgraded companies have access to 20% less and 10% more expensive credit, compared to similar employees of non-downgraded firms. Downgraded-firm workers are also 5 p.p. more likely to default on loans compared to employees from unaffected publicly-listed firms. These negative financial effects have real consequences and are larger for non-executive personnel, who cut 9% on consumption following the downgrade. Finally, we document that banks price an employee's risk of unemployment after an employer's downgrade since these effects are one order of magnitude stronger for "payroll loans," i.e., credit taken against a worker's salary.

Keywords: credit risk, default risk, employer-employee spillovers

JEL Classification: G21, G50, G51