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

Abstract

The importance of skilled labor and the inalienability of human capital expose firms to the risk of losing talent at critical times. Using Swedish microdata, 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 drives 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."For embattled employees of RadioShack, Wet Seal and other companies facing bankruptcy, the time to find a new job is long before the company goes under. […] 'The best time to find a job, is when you have a job,' says Ramin P. Baghai is with the Stockholm School of Economics. Rui C. Silva is with the Nova School of Business and Economics. Viktor Thell is with Finansinspektionen (Sweden's financial supervisory authority). Vikrant Vig is with the London Business School and the Kellogg School of Management at Northwestern University. We thank the Editor (Stefan Nagel), two anonymous referees

Selling Innovation in Bankruptcy

“…Normally, inventors of sold innovation leave the firm with a much higher intensity. Inventors also tend to leave a company after it files for bankruptcy-that is, there is a loss of talent and human capital (Graham et al, 2016;Baghai et al, 2017). Interestingly, coefficients associated with I(PatentBeingSold) lit × I(InBankruptcy) it are negative and marginally significant.…”

Career Risk and Market Discipline in Asset Management

“…We use career data for five years before and after the liquidation event, to make sure that the endpoints of the leads and lags are not a mixture of further leads and lags. Since it has been shown that talented workers tend to leave their companies when these approach bankruptcy (Baghai et al, 2017), we count as affected employees all those who were employed in the relevant fund in a two-year window prior to the event. This avoids the selection bias that could be induced by considering only those still working at the fund when it is wound up.…”

The paradox of being on the glass cliff: why do women accept risky leadership positions?

“…The acceptance of a glass cliff appointment can be considered a risky career decision. Numerous studies on career decision making and occupational choice (Baghai et al, 2018;Brown and Matsa, 2016;Ye, 2014) have focused on riskiness of career options, risk preferences and risk behaviors, showing that risk status of the job influences occupational choice. From a risk-taking perspective, the glass cliff phenomenon reveals an intriguing paradox; women are risk averse but choose risky leadership jobs.…”