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Employee Costs of Corporate Bankruptcy

Author

Listed:
  • JOHN R. GRAHAM
  • HYUNSEOB KIM
  • SI LI
  • JIAPING QIU

Abstract

An employee's annual earnings fall by 13% in the first full calendar year after her firm's bankruptcy, and the present value of lost earnings from bankruptcy to six years following bankruptcy is 87% of pre‐bankruptcy annual earnings. More worker earnings are lost in thin labor markets and among small firms. Ex ante compensating wage differentials for this “bankruptcy risk” are up to 2% of firm value for a firm whose credit rating falls from AA to BBB, comparable in magnitude to debt tax benefits. Thus, wage premia for expected costs of bankruptcy are sufficiently large to be an important consideration in capital structure decisions.

Suggested Citation

  • John R. Graham & Hyunseob Kim & Si Li & Jiaping Qiu, 2023. "Employee Costs of Corporate Bankruptcy," Journal of Finance, American Finance Association, vol. 78(4), pages 2087-2137, August.
    • Handle: RePEc:bla:jfinan:v:78:y:2023:i:4:p:2087-2137
    DOI: 10.1111/jofi.13251
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    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J61 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Geographic Labor Mobility; Immigrant Workers

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