Employee Costs of Corporate Bankruptcy / John R. Graham, Hyunseob Kim, Si Li, Jiaping Qiu.

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Graham, John R

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Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w25922.Publication details: Cambridge, Mass. National Bureau of Economic Research 2019.Description: 1 online resource: illustrations (black and white)Subject(s):

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Abstract: An employee's annual earnings fall by 10% the year her firm files for bankruptcy and fall by a cumulative present value of 67% over seven years. This effect is more pronounced in thin labor markets and among small firms that are ultimately liquidated. Compensating wage differentials for this "bankruptcy risk" are approximately 2.3% 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.

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Previous	nber w2592 Growth, Technological Progress, and Trade /	nber w25920 What Do Employee Referral Programs Do? Measuring the Direct and Overall Effects of a Management Practice /	nber w25921 International Student Mobility: Growth and Dispersion /	nber w25922 Employee Costs of Corporate Bankruptcy /	nber w25923 Good Dispersion, Bad Dispersion /	nber w25924 Why Unions Survive: Understanding How Unions Overcome The Free-Rider Problem /	nber w25925 The Political Economy Consequences of China's Export Slowdown /	Next

June 2019.

An employee's annual earnings fall by 10% the year her firm files for bankruptcy and fall by a cumulative present value of 67% over seven years. This effect is more pronounced in thin labor markets and among small firms that are ultimately liquidated. Compensating wage differentials for this "bankruptcy risk" are approximately 2.3% 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.