Criminals, Bankruptcy, and Cost of Debt
Review of Accounting Studies, Forthcoming
56 Pages Posted: 23 Apr 2021 Last revised: 27 May 2021
Date Written: April 21, 2021
We examine whether criminal records of CEOs and rank-and-file employees are associated with firms’ likelihood of bankruptcy and whether lenders adjust their required cost of debt accordingly. We use a nationwide sample of private firms and criminal registers covering all firm employees. We find that the likelihood of bankruptcy is positively associated with the CEO’s criminal record and the proportion of employees with criminal records. We find some, though less robust, evidence that lenders price a firm’s loan higher when its CEO has a criminal record and when more of its employees have criminal records. The results suggest that the characteristics of firm employees represent a risk that, to some extent, is priced by lenders.
Keywords: Bankruptcy prediction, criminal records, human capital, cost of debt
JEL Classification: G32, G33, G41, M12, M41, M54
Suggested Citation: Suggested Citation