Employee Costs of Corporate Bankruptcy
103 Pages Posted: 1 Apr 2022 Last revised: 6 Apr 2022
Date Written: March 1, 2022
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
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