The Labor Effects of Pro-Labor Bias in Bankruptcy

47 Pages Posted: 5 Apr 2021 Last revised: 10 Apr 2021

See all articles by Aloisio Araujo

Aloisio Araujo

Getulio Vargas Foundation (FGV) - FGV/EPGE Escola Brasileira de Economia e Finanças

Rafael Ferreira

University of São Paulo (FEA-USP) - Department of Economics

Spyridon Lagaras

University of Pittsburgh, Katz Graduate Business School

Flavio Moraes

Getulio Vargas Foundation (FGV) - FGV/EPGE Escola Brasileira de Economia e Finanças

Jacopo Ponticelli

Northwestern University - Kellogg School of Management

Margarita Tsoutsoura

Cornell University; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); National Bureau of Economic Research (NBER)

Date Written: April 2021

Abstract

Judicial decisions in bankruptcy are often influenced by the goal to preserve employment in financially distressed firms. What are the effects of these pro-labor decisions on workers' earnings and employment trajectories? We construct a new court-level measure of pro-labor bias based on the text of judicial decisions and exploit the random assignment of cases to courts within judicial districts in the state of Sao Paulo in Brazil to study the effect of pro-labor bias on labor market outcomes. We find that workers of firms assigned to high-pro-labor courts experience 4.4% lower post-bankruptcy earnings. This negative effect is primarily driven by wage adjustment rather than the probability of employment, and it is persistent in the five-year period after bankruptcy. We discuss several mechanisms that can drive this result.

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Suggested Citation

Araujo, Aloisio and Ferreira, Rafael and Lagaras, Spyridon and Moraes, Flavio and Ponticelli, Jacopo and Tsoutsoura, Margarita, The Labor Effects of Pro-Labor Bias in Bankruptcy (April 2021). NBER Working Paper No. w28640, Available at SSRN: https://ssrn.com/abstract=3819543

Aloisio Araujo (Contact Author)

Getulio Vargas Foundation (FGV) - FGV/EPGE Escola Brasileira de Economia e Finanças ( email )

Praia de Botafogo 190/1125, CEP
Rio de Janeiro RJ 22253-900
Brazil

Rafael Ferreira

University of São Paulo (FEA-USP) - Department of Economics ( email )

Av. Prof. Luciano Gualberto 908
Sao Paulo
Brazil

Spyridon Lagaras

University of Pittsburgh, Katz Graduate Business School ( email )

3950 Roberto Clemente Dr
334 Mervis Hall
Pittsburgh, PA Allegheny 15260
United States

Flavio Moraes

Getulio Vargas Foundation (FGV) - FGV/EPGE Escola Brasileira de Economia e Finanças ( email )

Praia de Botafogo 190/1125, CEP
Rio de Janeiro RJ 22253-900
Brazil

Jacopo Ponticelli

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

Margarita Tsoutsoura

Cornell University ( email )

Ithaca, NY 14853
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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