DP14383 Talent in Distressed Firms: Investigating the Labor Costs of Financial Distress

Author(s): Ramin P. Baghai, Rui C Silva, Viktor Thell, Vikrant Vig
Publication Date: February 2020
Keyword(s): bankruptcy, Capital Structure, Employees, financial distress, Talent
JEL(s):
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=14383

The importance of skilled labor and the inalienability of human capital expose firms to the risk of losing talent in critical times. Using Swedish micro-data, we document that firms lose workers with the highest cognitive and noncognitive skills as they approach bankruptcy. In a quasi-experiment, we confirm that financial distress is driving these results: following a negative export shock caused by exogenous currency movements, talent abandons the firm, but only if the exporter is highly leveraged. Consistent with talent dependence being associated with higher labor costs of financial distress, firms that rely more on talent have more conservative capital structures.