Employee Costs of Corporate Bankruptcy

96 Pages Posted: 10 Jun 2013 Last revised: 25 Jun 2021

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 4 versions of this paper

Date Written: June 25, 2021

Abstract

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

Suggested Citation

Graham, John Robert and Kim, Hyunseob and Li, Si and Qiu, Jiaping, Employee Costs of Corporate Bankruptcy (June 25, 2021). Available at SSRN: https://ssrn.com/abstract=2276753 or http://dx.doi.org/10.2139/ssrn.2276753

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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