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Personal Bankruptcy Laws and Corporate Policies

Published online by Cambridge University Press:  20 August 2019

Yi-Wen Chen ,
Joseph T. Halford ,
Hung-Chia Scott Hsu Open the ORCID record for Hung-Chia Scott Hsu [Opens in a new window]  and
Chu-Bin Lin
Yi-Wen Chen
Affiliation:
Chen, [email protected], Southwestern University of Finance and Economics School of Finance
Joseph T. Halford
Affiliation:
Halford, [email protected], University of Nevada, Reno College of Business
Hung-Chia Scott Hsu*
Affiliation:
Hsu, [email protected], University of Arkansas Walton College of Business
Chu-Bin Lin
Affiliation:
Lin, [email protected], Southwest Jiaotong University Department of Finance
*
Hsu (corresponding author), [email protected]
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Abstract

In this article we examine whether and how changes in personal bankruptcy laws, viewed as a shock to employees’ expected personal wealth, affect corporate policies. Following a reform in personal bankruptcy laws that limits individuals’ access to bankruptcy protection, firms more affected by this regulation reform increase labor costs, reduce investment, and engage in less risk taking. The effects are stronger when employees have more bargaining power. Furthermore, firms in industries characterized by high unemployment risk reduce leverage. These results support the view that firms choose more conservative policies to mitigate employees’ expected welfare losses.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 55 , Issue 7 , November 2020 , pp. 2397 - 2428
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2019

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Footnotes

We thank an anonymous referee, Henrik Cronqvist, Mara Faccio, Rachel Hayes, Shirley Hsieh, Huajing Hu (discussant), Wayne Lee, Paul Malatesta (the editor), Val Sibilkov, and seminar participants at the 2017 Financial Management Association Annual Meetings for their valuable comments. Part of the research was conducted while Halford was with the Finance Area, University of Wisconsin Milwaukee, whose hospitalities are gratefully acknowledged. All remaining errors are our own.

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