Is Corporate Credit Risk Propagated to Employees?

Posted: 31 Dec 2019

See all articles by Filipe Correia

Filipe Correia

University of Illinois at Urbana-Champaign - Department of Finance

Gustavo Cortes

Warrington College of Business, University of Florida

Thiago Silva

Government of the Federative Republic of Brazil - Central Bank of Brazil

Date Written: December 9, 2019

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

Suggested Citation

Correia, Filipe and Cortes, Gustavo and Silva, Thiago, Is Corporate Credit Risk Propagated to Employees? (December 9, 2019). Available at SSRN: https://ssrn.com/abstract=3501220

Filipe Correia (Contact Author)

University of Illinois at Urbana-Champaign - Department of Finance ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

Gustavo Cortes

Warrington College of Business, University of Florida ( email )

P.O. Box 117168
Gainesville, FL 32611
United States

HOME PAGE: http://warrington.ufl.edu/directory/person/9136/

Thiago Silva

Government of the Federative Republic of Brazil - Central Bank of Brazil ( email )

P.O. Box 08670
SBS Quadra 3 Bloco B - Edificio-Sede
Brasilia, Distr. Federal 70074-900
Brazil

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