DP12033 Corporate Leverage and Employees' Rights in Bankruptcy

Author(s): Andrew Ellul, Marco Pagano
Publication Date: May 2017
Date Revised: March 2019
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: cepr.org/active/publications/discussion_papers/dp.php?dpno=12033

Corporate leverage responds differently to employees' rights in bankruptcy depending on whether it is driven by strategic concerns in wage bargaining or by credit constraints. Using novel data on employees' rights in bankruptcy, we estimate their impact on leverage, exploiting time-series, cross-country and firm-level variation in the data. For financially unconstrained firms, results accord with the strategic debt model: leverage increases more in response to rises in corporate property values or profitability if employees have strong seniority in liquidation and weak rights in restructuring. Instead, in financially constrained firms leverage responds less to these shocks if employees have stronger seniority.