Boarding a Sinking Ship? An Investigation of Job Applications to Distressed Firms

Abstract

We use novel data from a leading online job search platform to examine the impact of corporate distress on firms' ability to attract job applicants. Survey responses suggest that job seekers accurately perceive firms' financial condition, as measured by companies' credit default swap prices and accounting data. Analyzing responses to job postings by major financial firms during the Great Recession, we find that an increase in an employer's distress results in fewer and lower quality applicants. These effects are particularly evident when the social safety net provides workers with weak protection against unemployment and for positions requiring a college education.A COMPANY'S FINANCIAL CONDITION has far-reaching effects on the firm, including on its ability to attract and retain human capital. Corporate distress can lead current employees to search for more stable positions and new recruits to focus their searches elsewhere. Concerns about short-run solvency strain a firm's reputation for treating employees fairly (Maksimovic and Titman (1991)), and corporate distress often leads firms to pay lower wages (Graham et al. (2013)) and to downsize their workforce. Average employment decreases by 10% around a bond covenant violation (Falato and Liang (2014)), by 27% around a bond default (Agrawal and Matsa (2013)), and by 50% or more around a bankruptcy filing (Hotchkiss (1995)).

Optimal Contracting, Corporate Finance, and Valuation with Inalienable Human Capital

“…In addition, when firms are severely financially constrained, we show that they cut compensation, reduce corporate investment, engage in asset sales, and reduce hedging positions, with the primary objective of surviving by honoring liabilities and retaining key employees. These latter predictions are in line with the findings of Rampini, Sufi, and Viswanathan (2014), Brown and Matsa (2016), and Donangelo (2014).…”

Parental Job Loss and Children's Long-Term Outcomes: Evidence from 7 Million Fathers' Layoffs

“…This approach eliminates selection into layoff within firms, but not selection into closing firms. Prior evidence suggests that selection of workers into closing firms may not be random (Brown and Matsa 2012;Abowd, Kramarz, and Margolis 1999). The event study approach developed above allows me to examine this concern directly.…”

Unemployment insurance and cash holdings of privately held firms around the world

“…These increasing financial buffers reduce the likelihood that firms must fire employees in bad times (Devos & Rahman, 2018). Such cash buffers also reduce the risk of financial distress, which has been found to hamper the hiring of new employees (Brown & Matsa, 2016). Countries differ tremendously in the degree of public employment insurance they provide (e.g., Ellul, Pagano & Schivardi, 2018).…”

“…First, employees are willing to accept lower wages and benefits if the perceived unemployment risk is lower. Second, a lower unemployment risk facilitates the hiring of new employees (Brown & Matsa, 2016;Devos & Rahman, 2018). In addition, we hypothesize that the issuance of new debt, which is the main source of external finance for privately-held firms (Brav, 2009), results in larger cash balances in countries with weaker public unemployment insurance.…”