Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/264323 
Year of Publication: 
2022
Series/Report no.: 
Working Paper No. WP 2022-09
Publisher: 
Federal Reserve Bank of Chicago, Chicago, IL
Abstract: 
An employee's annual earnings fall by 13% the year her firm files for 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 approximately 2% of firm value for a firm whose credit rating falls from AA to BBB, comparable to the magnitude of 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.
JEL: 
G32
G33
J21
J31
J61
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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