The Labor Impact of Corporate Bankruptcy Graham, Kim, Li and Qiu

Transcription

1 The Labor Impact of Corporate Bankruptcy Graham, Kim, Li and Qiu Discussion by Paige Ouimet CSEF-EIEF-SITE Conference on Finance and Labor (Rome, August 28-30, 2015)

2 Summary Interesting paper Lots and lots ( and lots.) of work LEHD: Census worker-level data LBD: Census establishment-level data ASM/CMF: Census data on manufacturing BRD: Database on bankruptcies New Generation Research: Database on bankruptcies at private firms

3 3 Papers 1. There are negative wage implications for employees working at firms which go bankrupt 2. Employees demand higher wages when employed at firms more likely to go bankrupt 3. Since firms must compensate employees with higher wages if more levered, this reduces the net benefits to leverage. A lot of richness in this analysis More coarse analysis Use some of the cross-sectional detail in Section 1 to motivate more refined predictions in the later sections.

4 Employee costs, due to distress, are higher when: Working in a small local-industry labor market Working in a small national-industry labor market Working in an area with a high local unemployment rate Working at a small or private firm Working in an industry with high union coverage For older and more tenured workers

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6 Financial Distress Risk and Wages Firms with higher market leverage pay higher wages, on average. Firms have to pay higher wages to compensate workers for higher expected probability of bankruptcy..alternatively, firms with greater growth opportunities can more easily borrow and invest in more skilled labor (as proxied by higher wages) Alternatively, firms with stronger employees (as evidenced by high wages) take on more debt to increase strategic bargaining..alternatively, firms with bad managers are less profitable and, hence, less able to pay off their debt and also these managers pay higher wages. Concern: omitted variable drives leverage and drives wages.

7 Financial Distress Risk and Wages (cont) Suggests a (triple) dif-in-dif approach: Within firms: employees most likely to be harmed by bankruptcy to employees least likely to be harmed by bankruptcy Across firms: firms more or less likely to experience financial distress For example: Within firm wage gap between workers in small labor markets/ workers in large labor markets should be greater at firms more likely to go into financial distress Can provide evidence more specific to a causal relation between leverage and wages as well as better integrate different parts of the paper.

8 Financial Distress Risk and Wages (cont) The authors have this great data would love to see them take full advantage of their data quality Can the authors precisely identify the mechanism by which higher distress risk is correlated with higher wages? Is the effect coming through new hires? Brown and Matsa (2015) If so, then do all new hires get a wage premium? Is the effect coming through raises to top performers who threaten to quit when they anticipate distress? If firms raise wages at time when at greatest risk to bankruptcy, speaks to the value of retaining human capital What fraction of workers receive raises relative to control firm Is there a steeper wage curve at high distress firms? Workers with high firm specific human capital have the most to lose in bankruptcy. Does the firm have to provide workers with greater incentives to stay and invest in human capital? It would be interesting to know about typical worker wage profile at highversus low- distress likelihood.

9 Magnitude of Wage Premium vs. Tax Benefits of Debt Really cool idea Find wage premiums offset 11%(22%) tax benefits of debt for AAA (BBB) firms. But this estimate is based on subset of workers. (What fraction of total?) Must be (continuously) employed Must be employed for 2 years before event Must be between 20 and 55 years of age. If make assumptions about workers not in LEHD data, then results either get 2 to 3x as large or become insignificantly different from zero. A lot of noise generated by using an estimate that is averaged across worker types and firm types. Workers can leave a high-leverage firm when bankruptcy nears (ex ante departures) In matched sample, 60% of employees leave firm Explaining the cross-section may be more promising direction.

10 Estimating Human Costs of Bankruptcy Other studies in econ looking at costs to workers from plant closures. If key that this is on bankruptcy not financial distress, then what specifically do we learn? Do workers at firms in Chapter 11 experience less of an overall negative shock? Can you compare to other studies? Or, maybe conclusion is that if Chpt 11 is designed to protect jobs, should judges think about which job losses are more or less costly? If possible, would love to see by bad product Chapter 11 versus financial distress Chapter 11.

11 Estimating Human Costs of Bankruptcy (cont) Need to be more upfront about endogeneity Exists across all tests But also likely to be more important in some samples versus others. Mostly a comment about interpretation But, in some cases, authors can do more: For example, all regressions look at one variable at a time. Can control for multiple characteristics at once (tenure and age) How are workers assigned to a given county at firms with multiple establishments in a given state?

12 Estimating Human Costs of Bankruptcy (cont) Important to include periods of unemployment in calculation. Most people don t move out of state. Or focus on states where we know there is even less migration, like Texas. Why not include all worker ages and tenures? You are trying to understand the cross-sectional variation of these costs. Seems odd to then exclude some workers (low tenure) out of concern they will have low costs to working at bankrupt firm. Are you accounting for unemployment insurance and other benefits? What is the mean period of tenure (starting at match year) at control firms? This would be a better predictor of the assumed tenure in the absence of bankruptcy. Given 60% of these employees leave the firm, 10 years (infinite) seems aggressive. Can you estimate costs per year by type and number of years by type? How does wage growth compare for employees at bankrupt firms (after job change) to control employees?

13 Minor Comment What explains the positive and statistically significant coefficients on relative wages years -4 to years + 6. Suggests wages are particularly low in years -5/6 for both treated and matched firms. Pattern is there with matched sample and random sample and across all controls. Authors state that bankruptcy may or may not be driven by leverage but then use leverage to look at compensating wage differentials. Can be addressed with writing. Education is imputed.

14 Conclusion Very nice paper. A lot of interesting results. Hopefully UNC will not go bankrupt. I encourage the authors to go a bit deeper in terms of digging into the results and offering the reader interpretations of their findings.