Abstract
Using a sample of 2104 Japanese firms, we investigate the effect of employee deposits – a form of employee inside debt – on firms’ risk-taking behavior. Our identification strategy utilizes a new law in 2003 that changed the priority of employee deposits in bankruptcy and led to large scale withdrawals of employee deposits. Our results indicate that firms with higher levels of employee deposits have lower total risk, systematic risk, and idiosyncratic risk, engage in less risk-taking investment, and have higher leverage. Our findings suggest that the holding of the company’s debt by its employees can reduce the agency costs of debt.
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