Labor Turnover, Information Production, and Bank Risk

We investigate the theoretical mechanisms through which labor turnover adversely affects bank risk and performance. Using monthly matched employer-employee data from Brazil during 2003-2019, we find banks with higher labor turnover show lower risk buffers, higher loan growth, and lower profitability. These adverse effects align with the firm-specific human capital theory. Consistent with our identifying assumptions, the effects are stronger when turnover reduces experience and expertise, among loan officers, as well as across cities and banks. Placebo tests and further analyses confirm our results. The evidence suggests that high labor turnover impairs bank information production, increasing risk and lowering performance.