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

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.

No abstract