Employee Treatment and Bank Default Risk during the Credit Crisis

Abstract

We examine whether banks’ interest in the well-being of their workforce, measured by an index of employee relations strengths, explains their default risk during the recent credit crisis. Using a sample of 179 U.S. banks, we find that banks with greater pre-crisis employee relations strengths experience lower default risk and have higher excess returns during the crisis. These banks have lower asset volatility and leverage, suggesting that bank default risk is mitigated through lowering operational and financial risks. Banks’ prudent risk-taking behavior benefits shareholders in times of heightened risk. The results are robust to alternative model specifications and endogeneity issues.