Corporate Leverage and Employees' Rights in Bankruptcy
Event details
| Date | 09.12.2016 |
| Hour | 10:30 › 12:00 |
| Speaker | Andrew ELLUL (Indiana University) |
| Location | |
| Category | Conferences - Seminars |
The seniority of employees’ claims in the liquidation of insolvent firms, and their rights in the renegotiation of their debt varies greatly across countries. We show that the balance between these rights of employees and those of other creditors should affect the leverage chosen by firms. In a simple model of strategic leverage, employees’ seniority is predicted to increase the positive response of leverage to appreciation of its real estate or an increase in its revenue, while stronger employees’ rights in the renegotiation of corporate debt have the opposite effect. These predictions differ starkly from those that obtain if firms’ leverage is determined by a collateral constraint. To test them, we construct novel measures of employees’ protection in bankruptcy via questionnaires to law firms and other sources, and investigate whether these measures affect the response of firm leverage in a sample of 13,809 companies in 28 countries. We find that increases in the value of firms’ real estate or profits are associated with larger increases in leverage by companies whose employees have strong seniority in liquidation and weaker rights in restructuring, consistently with the strategic use of leverage, not with credit rationing.
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