Corporate Reorganization as Labor Insurance in Bankruptcy

Abstract

This paper investigates the consequences of corporate reorganization and liquidation on the reallocation of labor in bankruptcy using a random judge assignment design and reorganization filings from Portugal. Reorganization provides labor insurance to workers in bankruptcy, having a positive and persistent effect on wages, even as most workers leave reorganized firms. Reduced human capital losses and improved worker-firm matches with new employers are two mechanisms that explain the effect of reorganization on wages. The positive effect of reorganization on worker outcomes is concentrated in thin and low-growth labor markets.

Keywords: corporate reorganization, bankruptcy, cost of job loss

JEL Classification: G33, G38, J24, J63, K39,