Employee Costs of Corporate Bankruptcy

103 Pages Posted: 1 Apr 2022 Last revised: 6 Apr 2022

See all articles by John R. Graham

John R. Graham

Duke University; National Bureau of Economic Research (NBER)

Hyunseob Kim

Federal Reserve Bank of Chicago

Si Li

Wilfrid Laurier University - School of Business & Economics

Jiaping Qiu

McMaster University - Michael G. DeGroote School of Business

Multiple version iconThere are 5 versions of this paper

Date Written: March 1, 2022

Abstract

Employees' annual earnings fall by 13% the year their firm files for bankruptcy, and the present value of lost earnings from bankruptcy to six years following bankruptcy is 87% of pre-bankruptcy annual earnings. More worker earnings are lost in thin labor markets and among small firms. Ex ante compensating wage differentials for this “bankruptcy risk” are approximately 2% of firm value for a firm whose credit rating falls from AA to BBB, comparable to the magnitude of debt tax benefits. Thus, wage premia for expected costs of bankruptcy are of sufficient magnitude to be an important consideration in corporate capital structure decisions.

Keywords: Bankruptcy, Labor Force and Employment, Size, and Structure, Wage Level and Structure, Wage Differentials

JEL Classification: G32, G33, J21, J31, J61

Suggested Citation

Graham, John Robert and Kim, Hyunseob and Li, Si and Qiu, Jiaping, Employee Costs of Corporate Bankruptcy (March 1, 2022). FRB of Chicago Working Paper No. 2022-09, Available at SSRN: https://ssrn.com/abstract=4072857 or http://dx.doi.org/10.2139/ssrn.4072857

John Robert Graham

Duke University ( email )

Box 90120
Durham, NC 27708-0120
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National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
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Hyunseob Kim (Contact Author)

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States

HOME PAGE: http://sites.google.com/view/hyunseobkim/research

Si Li

Wilfrid Laurier University - School of Business & Economics ( email )

Waterloo, Ontario N2L 3C5
Canada

Jiaping Qiu

McMaster University - Michael G. DeGroote School of Business ( email )

1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada

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