The labor effects of judicial bias in bankruptcy

Aloisio Araujo; Rafael Ferreira; Spyridon Lagaras; Flavio Moraes; Jacopo Ponticelli; Margarita Tsoutsoura

doi:10.1016/j.jfineco.2023.103720

The labor effects of judicial bias in bankruptcy

Aloisio Araujo, Rafael Ferreira, Spyridon Lagaras, Flavio Moraes, Jacopo Ponticelli, Margarita Tsoutsoura^*

^*Corresponding author for this work

Finance

Research output: Contribution to journal › Article › peer-review

3 Scopus citations

Abstract

We study the effect of judicial bias favoring firm continuation in bankruptcy on the labor market outcomes of employees by exploiting the random assignment of cases across courts in the State of São Paulo in Brazil. Employees of firms assigned to courts that favor firm continuation are more likely to stay with their employer, but they earn, on average, lower wages three to five years after bankruptcy. We discuss several potential mechanisms that can rationalize this result, and provide evidence that imperfect information about outside options in the local labor market and adjustment costs associated with job change play an important role.

Original language	English (US)
Article number	103720
Journal	Journal of Financial Economics
Volume	150
Issue number	2
DOIs	https://doi.org/10.1016/j.jfineco.2023.103720
State	Published - Nov 2023

Funding

Toni Whited was the editor for this article. We are grateful for comments from David Denis, Edith Hotchkiss, Hyunseob Kim, David Matsa, Gregor Matvos, Sean Higgins, Mounu Prem, Julia Fonseca (discussant), Rui Silva (discussant), Qiping Xu (discussant), Ashwini Agrawal (discussant), Sam Antill (discussant), Adrien Matray (discussant), Geoffrey Tate (discussant) and seminar/conference participants at University of Mannheim, Northwestern University (Kellogg), University of Groningen, Cornell University (Johnson), Indiana University (Kelley), Rutgers University, London Business School, University of Kentucky (Gatton), University of British Columbia (Sauder), Penn State (Smeal), Central European University, Washington University in St. Louis (Olin), Alliance Manchester Business School, City University London, Georgia Tech (Scheller), Arizona State University (Carey), Cyprus University of Technology, CMU-Pitt-PSU Finance Conference, JADE-CEPR-TIME Conference on Economic Development, Virtual Corporate Finance Seminar, Adam Smith, UofToronto Finance Conference, FIRS, SFS Cavalcade, Labor and Finance Online Seminar, EFA, AFA, and Red Rock Finance Conference. Tsoutsoura thanks the Einaudi Center at Cornell University for financial support. Araujo and Moraes thank the Coordenação de Aperfeiçoamento de Pessoal de Nível Superior (CAPES, Brasil - Finance Code 001), Fundação de Amparo á Pesquisa do Estado do Rio de Janeiro (Faperj) and Conselho Nacional de Desenvolvimento Científico e Tecnológico (CNPq) for financial support. We thank Xinyu Cao and Ariza Gusti for excellent research assistance. ☆ Toni Whited was the editor for this article. We are grateful for comments from David Denis, Edith Hotchkiss, Hyunseob Kim, David Matsa, Gregor Matvos, Sean Higgins, Mounu Prem, Julia Fonseca (discussant), Rui Silva (discussant), Qiping Xu (discussant), Ashwini Agrawal (discussant), Sam Antill (discussant), Adrien Matray (discussant), Geoffrey Tate (discussant) and seminar/conference participants at University of Mannheim, Northwestern University (Kellogg), University of Groningen, Cornell University (Johnson), Indiana University (Kelley), Rutgers University, London Business School, University of Kentucky (Gatton), University of British Columbia (Sauder), Penn State (Smeal), Central European University, Washington University in St. Louis (Olin), Alliance Manchester Business School, City University London, Georgia Tech (Scheller), Arizona State University (Carey), Cyprus University of Technology, CMU-Pitt-PSU Finance Conference, JADE-CEPR-TIME Conference on Economic Development, Virtual Corporate Finance Seminar, Adam Smith, UofToronto Finance Conference, FIRS, SFS Cavalcade, Labor and Finance Online Seminar, EFA, AFA, and Red Rock Finance Conference. Tsoutsoura thanks the Einaudi Center at Cornell University for financial support. Araujo and Moraes thank the Coordenação de Aperfeiçoamento de Pessoal de Nível Superior (CAPES, Brasil - Finance Code 001), Fundação de Amparo á Pesquisa do Estado do Rio de Janeiro (Faperj) and Conselho Nacional de Desenvolvimento Científico e Tecnológico (CNPq) for financial support. We thank Xinyu Cao and Ariza Gusti for excellent research assistance.

Keywords

Brazil
Financial distress
Information frictions
Wages

ASJC Scopus subject areas

Accounting
Finance
Economics and Econometrics
Strategy and Management

UN SDGs

This output contributes to the following UN Sustainable Development Goals (SDGs)

Access to Document

10.1016/j.jfineco.2023.103720

Cite this

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title = "The labor effects of judicial bias in bankruptcy",

abstract = "We study the effect of judicial bias favoring firm continuation in bankruptcy on the labor market outcomes of employees by exploiting the random assignment of cases across courts in the State of S{\~a}o Paulo in Brazil. Employees of firms assigned to courts that favor firm continuation are more likely to stay with their employer, but they earn, on average, lower wages three to five years after bankruptcy. We discuss several potential mechanisms that can rationalize this result, and provide evidence that imperfect information about outside options in the local labor market and adjustment costs associated with job change play an important role.",

keywords = "Brazil, Financial distress, Information frictions, Wages",

author = "Aloisio Araujo and Rafael Ferreira and Spyridon Lagaras and Flavio Moraes and Jacopo Ponticelli and Margarita Tsoutsoura",

note = "Funding Information: Toni Whited was the editor for this article. We are grateful for comments from David Denis, Edith Hotchkiss, Hyunseob Kim, David Matsa, Gregor Matvos, Sean Higgins, Mounu Prem, Julia Fonseca (discussant), Rui Silva (discussant), Qiping Xu (discussant), Ashwini Agrawal (discussant), Sam Antill (discussant), Adrien Matray (discussant), Geoffrey Tate (discussant) and seminar/conference participants at University of Mannheim, Northwestern University (Kellogg), University of Groningen, Cornell University (Johnson), Indiana University (Kelley), Rutgers University, London Business School, University of Kentucky (Gatton), University of British Columbia (Sauder), Penn State (Smeal), Central European University, Washington University in St. Louis (Olin), Alliance Manchester Business School, City University London, Georgia Tech (Scheller), Arizona State University (Carey), Cyprus University of Technology, CMU-Pitt-PSU Finance Conference, JADE-CEPR-TIME Conference on Economic Development, Virtual Corporate Finance Seminar, Adam Smith, UofToronto Finance Conference, FIRS, SFS Cavalcade, Labor and Finance Online Seminar, EFA, AFA, and Red Rock Finance Conference. Tsoutsoura thanks the Einaudi Center at Cornell University for financial support. Araujo and Moraes thank the Coordena{\c c}{\~a}o de Aperfei{\c c}oamento de Pessoal de N{\'i}vel Superior (CAPES, Brasil - Finance Code 001), Funda{\c c}{\~a}o de Amparo {\'a} Pesquisa do Estado do Rio de Janeiro (Faperj) and Conselho Nacional de Desenvolvimento Cient{\'i}fico e Tecnol{\'o}gico (CNPq) for financial support. We thank Xinyu Cao and Ariza Gusti for excellent research assistance. Funding Information: ☆ Toni Whited was the editor for this article. We are grateful for comments from David Denis, Edith Hotchkiss, Hyunseob Kim, David Matsa, Gregor Matvos, Sean Higgins, Mounu Prem, Julia Fonseca (discussant), Rui Silva (discussant), Qiping Xu (discussant), Ashwini Agrawal (discussant), Sam Antill (discussant), Adrien Matray (discussant), Geoffrey Tate (discussant) and seminar/conference participants at University of Mannheim, Northwestern University (Kellogg), University of Groningen, Cornell University (Johnson), Indiana University (Kelley), Rutgers University, London Business School, University of Kentucky (Gatton), University of British Columbia (Sauder), Penn State (Smeal), Central European University, Washington University in St. Louis (Olin), Alliance Manchester Business School, City University London, Georgia Tech (Scheller), Arizona State University (Carey), Cyprus University of Technology, CMU-Pitt-PSU Finance Conference, JADE-CEPR-TIME Conference on Economic Development, Virtual Corporate Finance Seminar, Adam Smith, UofToronto Finance Conference, FIRS, SFS Cavalcade, Labor and Finance Online Seminar, EFA, AFA, and Red Rock Finance Conference. Tsoutsoura thanks the Einaudi Center at Cornell University for financial support. Araujo and Moraes thank the Coordena{\c c}{\~a}o de Aperfei{\c c}oamento de Pessoal de N{\'i}vel Superior (CAPES, Brasil - Finance Code 001), Funda{\c c}{\~a}o de Amparo {\'a} Pesquisa do Estado do Rio de Janeiro (Faperj) and Conselho Nacional de Desenvolvimento Cient{\'i}fico e Tecnol{\'o}gico (CNPq) for financial support. We thank Xinyu Cao and Ariza Gusti for excellent research assistance. Publisher Copyright: {\textcopyright} 2023 Elsevier B.V.",

year = "2023",

month = nov,

doi = "10.1016/j.jfineco.2023.103720",

language = "English (US)",

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T1 - The labor effects of judicial bias in bankruptcy

AU - Araujo, Aloisio

AU - Ferreira, Rafael

AU - Lagaras, Spyridon

AU - Moraes, Flavio

AU - Ponticelli, Jacopo

AU - Tsoutsoura, Margarita

N1 - Funding Information: Toni Whited was the editor for this article. We are grateful for comments from David Denis, Edith Hotchkiss, Hyunseob Kim, David Matsa, Gregor Matvos, Sean Higgins, Mounu Prem, Julia Fonseca (discussant), Rui Silva (discussant), Qiping Xu (discussant), Ashwini Agrawal (discussant), Sam Antill (discussant), Adrien Matray (discussant), Geoffrey Tate (discussant) and seminar/conference participants at University of Mannheim, Northwestern University (Kellogg), University of Groningen, Cornell University (Johnson), Indiana University (Kelley), Rutgers University, London Business School, University of Kentucky (Gatton), University of British Columbia (Sauder), Penn State (Smeal), Central European University, Washington University in St. Louis (Olin), Alliance Manchester Business School, City University London, Georgia Tech (Scheller), Arizona State University (Carey), Cyprus University of Technology, CMU-Pitt-PSU Finance Conference, JADE-CEPR-TIME Conference on Economic Development, Virtual Corporate Finance Seminar, Adam Smith, UofToronto Finance Conference, FIRS, SFS Cavalcade, Labor and Finance Online Seminar, EFA, AFA, and Red Rock Finance Conference. Tsoutsoura thanks the Einaudi Center at Cornell University for financial support. Araujo and Moraes thank the Coordenação de Aperfeiçoamento de Pessoal de Nível Superior (CAPES, Brasil - Finance Code 001), Fundação de Amparo á Pesquisa do Estado do Rio de Janeiro (Faperj) and Conselho Nacional de Desenvolvimento Científico e Tecnológico (CNPq) for financial support. We thank Xinyu Cao and Ariza Gusti for excellent research assistance. Funding Information: ☆ Toni Whited was the editor for this article. We are grateful for comments from David Denis, Edith Hotchkiss, Hyunseob Kim, David Matsa, Gregor Matvos, Sean Higgins, Mounu Prem, Julia Fonseca (discussant), Rui Silva (discussant), Qiping Xu (discussant), Ashwini Agrawal (discussant), Sam Antill (discussant), Adrien Matray (discussant), Geoffrey Tate (discussant) and seminar/conference participants at University of Mannheim, Northwestern University (Kellogg), University of Groningen, Cornell University (Johnson), Indiana University (Kelley), Rutgers University, London Business School, University of Kentucky (Gatton), University of British Columbia (Sauder), Penn State (Smeal), Central European University, Washington University in St. Louis (Olin), Alliance Manchester Business School, City University London, Georgia Tech (Scheller), Arizona State University (Carey), Cyprus University of Technology, CMU-Pitt-PSU Finance Conference, JADE-CEPR-TIME Conference on Economic Development, Virtual Corporate Finance Seminar, Adam Smith, UofToronto Finance Conference, FIRS, SFS Cavalcade, Labor and Finance Online Seminar, EFA, AFA, and Red Rock Finance Conference. Tsoutsoura thanks the Einaudi Center at Cornell University for financial support. Araujo and Moraes thank the Coordenação de Aperfeiçoamento de Pessoal de Nível Superior (CAPES, Brasil - Finance Code 001), Fundação de Amparo á Pesquisa do Estado do Rio de Janeiro (Faperj) and Conselho Nacional de Desenvolvimento Científico e Tecnológico (CNPq) for financial support. We thank Xinyu Cao and Ariza Gusti for excellent research assistance. Publisher Copyright: © 2023 Elsevier B.V.

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AB - We study the effect of judicial bias favoring firm continuation in bankruptcy on the labor market outcomes of employees by exploiting the random assignment of cases across courts in the State of São Paulo in Brazil. Employees of firms assigned to courts that favor firm continuation are more likely to stay with their employer, but they earn, on average, lower wages three to five years after bankruptcy. We discuss several potential mechanisms that can rationalize this result, and provide evidence that imperfect information about outside options in the local labor market and adjustment costs associated with job change play an important role.

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KW - Information frictions

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The labor effects of judicial bias in bankruptcy

Abstract

Funding

Keywords

ASJC Scopus subject areas

UN SDGs

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