Debt Covenant Violations and Employee Safety

Abstract

We study the impact of creditor control rights increases on rank-and-file employees. Using a regression discontinuity design, we provide evidence that workplace safety deteriorates when creditors gain bargaining power in the event of a debt covenant violation. The frequency of workplace injuries and illnesses increase more for firms with severe financing constraints and a less active labor union. These results are robust to entropy balancing and a host of alternative specifications. In sum, our results provide compelling evidence on how increased interference and cost-cutting pressures by creditors can impair the working conditions of employees.