The Labor Effects of Judicial Bias in Bankruptcy

48 Pages Posted: 19 Jan 2021 Last revised: 7 Nov 2023

See all articles by Aloisio Pessoa de Araujo

Aloisio Pessoa de Araujo

Getulio Vargas Foundation (FGV) - Escola de Pos-Graduacao (EPGE) and IMPA

Rafael Ferreira

University of São Paulo (FEA-USP) - Department of Economics

Spyridon Lagaras

University of Pittsburgh, Katz Graduate Business School

Flavio Moraes

Getulio Vargas Foundation (FGV) - FGV/EPGE Escola Brasileira de Economia e Finanças

Jacopo Ponticelli

Northwestern University - Kellogg School of Management; NBER

Margarita Tsoutsoura

Washington University in Saint Louis, John M. Olin Business School

Date Written: December 29, 2020

Abstract

We study the effect of judicial bias favoring firm continuation in bankruptcy on the labor market outcomes of employees by exploiting the random assignment of cases across courts in the State of Sao Paulo in Brazil. Employees of fi rms assigned to courts that favor fi rm continuation are more likely to stay with their employer, but they earn, on average, lower wages three to five years after bankruptcy. We discuss several potential mechanisms that can rationalize this result, and provide evidence that imperfect information about outside options in the local labor market and adjustment costs associated with job change play an important role.

Keywords: Brazil, Wages, Information Frictions, Financial Distress

JEL Classification: G33, G20, K10

Suggested Citation

Araujo, Aloisio Pessoa de and Ferreira, Rafael and Lagaras, Spyridon and Moraes, Flavio and Ponticelli, Jacopo and Tsoutsoura, Margarita, The Labor Effects of Judicial Bias in Bankruptcy (December 29, 2020). Journal of Financial Economics (JFE), Vol. 150, No. 2, 2023, Available at SSRN: https://ssrn.com/abstract=3757117 or http://dx.doi.org/10.2139/ssrn.3757117

Aloisio Pessoa de Araujo

Getulio Vargas Foundation (FGV) - Escola de Pos-Graduacao (EPGE) and IMPA ( email )

R. Dr. Neto de Araujo 320 cj 1307
Rio de Janeiro, Rio de Janeiro 22250-900
Brazil

Rafael Ferreira

University of São Paulo (FEA-USP) - Department of Economics ( email )

Av. Prof. Luciano Gualberto 908
Sao Paulo
Brazil

Spyridon Lagaras

University of Pittsburgh, Katz Graduate Business School ( email )

3950 Roberto Clemente Dr
334 Mervis Hall
Pittsburgh, PA Allegheny 15260
United States

Flavio Moraes

Getulio Vargas Foundation (FGV) - FGV/EPGE Escola Brasileira de Economia e Finanças ( email )

Praia de Botafogo 190/1125, CEP
Rio de Janeiro RJ 22253-900
Brazil

Jacopo Ponticelli

Northwestern University - Kellogg School of Management ( email )

2211 Campus Dr
Evanston, IL 60208
United States

HOME PAGE: http://www.kellogg.northwestern.edu/faculty/ponticelli/index.html

NBER ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Margarita Tsoutsoura (Contact Author)

Washington University in Saint Louis, John M. Olin Business School ( email )

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