Verwijmeren, Patrick and Jeroen Derwall. "Employee Well-Being, Firm Leverage, and Bankruptcy Risk." Journal of Banking and Finance, 2010.

Working paper available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1495374

This paper argues that employees of liquidating firms are likely to lose income and non-pecuniary benefits of working for the firm, which makes bankruptcy costly for employees. The authors examine whether firms take these costs into account when deciding on the optimal amount of leverage in the firm. Their empirical analysis shows that U.S. firms with highest scores on an employee well-being index have lower debt ratios, which reduces the probability of bankruptcy. An analysis of firms' debt/equity repurchase/issue decisions supports their hypothesized association between employee well-being and leverage. Finally, the authors find that firms with better employee track records have better credit ratings, even after controlling for differences in firm leverage.