Abstract
We show that corporate bankruptcy leads to a significant reduction in employee earnings, which in turn increases financial distress costs for firms via higher ex ante wages. Annual employee earnings deteriorate by 10% when a firm files for bankruptcy and remain below pre-bankruptcy earnings for at least six years. Affected employees are likely to work fewer hours and leave the firm, industry, and local labor market. We estimate that compensating wage differentials for this “bankruptcy risk” increase the present value of ex ante wages paid by the firm by up to 12% of annual wages. Overall, this paper shows that bankruptcy risk reduces risk-sharing between the firm and workers, and the resulting additional labor costs are large enough to be a first-order consideration in corporate capital structure decisions.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Disclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.