Employee Costs of Corporate Bankruptcy
96 Pages Posted: 10 Jun 2013 Last revised: 25 Jun 2021
Date Written: June 25, 2021
An employee’s annual earnings fall by 12% the year her firm files for bankruptcy, and the present value of lost earnings over seven years post-bankruptcy is 85% of pre-bankruptcy annual earnings. More 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, about the same magnitude as 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, risk sharing, costs of financial distress, capital structure, labor mobility, worker-firm matched data
JEL Classification: G32, G33, J21, J31, J61
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