Employee Costs of Corporate Bankruptcy

68 Pages Posted: 11 Jun 2019 Last revised: 31 Oct 2021

See all articles by John R. Graham

John R. Graham

Duke University; National Bureau of Economic Research (NBER)

Hyunseob Kim

Federal Reserve Bank of Chicago

Si Li

Wilfrid Laurier University - School of Business & Economics

Jiaping Qiu

McMaster University - Michael G. DeGroote School of Business

Multiple version iconThere are 4 versions of this paper

Date Written: June 2019

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.

Suggested Citation

Graham, John Robert and Kim, Hyunseob and Li, Si and Qiu, Jiaping, Employee Costs of Corporate Bankruptcy (June 2019). Available at SSRN: https://ssrn.com/abstract=3401628

John Robert Graham (Contact Author)

Duke University ( email )

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National Bureau of Economic Research (NBER)

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Hyunseob Kim

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States

HOME PAGE: http://sites.google.com/view/hyunseobkim/research

Si Li

Wilfrid Laurier University - School of Business & Economics ( email )

Waterloo, Ontario N2L 3C5
Canada

Jiaping Qiu

McMaster University - Michael G. DeGroote School of Business ( email )

1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada

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