Bankers’ Outside Options and Financial Risk

Firms can discipline workers through the threat of termination, but the value of continued employment depends on job opportunities in the external labor market. We study how bankers’ outside options affect risky lending. Using granular em ployment histories and predetermined coworker links, we construct a time-varying bank-level measure of outside options from hiring at connected financial institutions. A standard-deviation improvement in outside options raises non-investment-grade lending growth by 1.6 to 3.0 percentage points and shifts loans toward borrowers with greater ex-ante and realized risk without detectable compensating loan spreads. Mea sures of bank and systemic risk also increase. Among individually matched bankers, outside options increase borrower risk and weaken the separation penalty following poor loan performance. The risk response is concentrated among younger bankers, who are more mobile. Financial advisors exhibit a similar pattern of increased mis conduct followed by weaker employment penalties under improved outside options. The evidence indicates that workplace discipline is dependent on external labor mar ket conditions, transmitting labor market fluctuations into credit risk.