DP12033 Corporate Leverage and Employees' Rights in Bankruptcy

Author(s): Andrew Ellul, Marco Pagano
Publication Date: May 2017
Keyword(s): bankruptcy, leverage, seniority, wage bargaining, workers’ rights
JEL(s): G31, G32, G38, H25, H26, M40
Programme Areas: Labour Economics, Financial Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=12033

Corporate leverage responds differently to employees' legal protection in bankruptcy depending on whether leverage is chosen to curtail workers' bargaining power or is driven by credit constraints. Using newly collected cross-country data on employees' rights in corporate bankruptcy, we estimate the impact of such rights on firms' capital structure, applying triple-diff strategies that exploit time-series, cross-country and firm-level variation. The estimates show that leverage increases more substantially in response to rises in corporate property values or in profitability at firms where employees have strong seniority in liquidation and weak rights in restructuring, consistently with the strategic use of leverage.