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Session 2: Labor and Finance

July 31 - August 2, 2017
Organized by: 
  • Jonathan Berk (Stanford Graduate School of Business)
  • Luigi Pistaferri (Stanford University)
  • Philip Bond (University of Washington)
  • Claudio Michelacci (Einaudi Institute for Economics and Finance)
  • Marco Pagano (University of Naples Federico II, Center for Studies in Economics and Finance and EIEF)

The location for this session will be Landau Economics Bldg, Lucas Conference Room A, 579 Serra Mall.

The Stanford Institute for Theoretical Economics (SITE), in cooperation with the Center for Studies in Economics and Finance (CSEF), and the Einaudi Institute for Economics and Finance (EIEF), invites paper submissions on the relationships between labor and finance.  Possible issues include:

  • role of employees in the governance and financing of companies,
  • response of wages and employment to financial shocks,
  • risk sharing arrangements between firms and workers,
  • financial development, job reallocation and employment growth,
  • effects of regulation of financial markets on industrial relations,
  • human capital, portfolio choice and asset pricing.

The conference aims to bring together researchers from labor and financial economics to discuss issues from the point of view of both disciplines. 

In this Session

Jul 31 | 1:30 pm to 2:30 pm

The Dark Side of Hedge Fund Activism: Evidence from Employee Pension Plans

Presented by: Anup Agrawal, University of Alabama
Co-Author(s): Yuree Lim, University of Wisconsin-La Crosse

This study examines whether shareholder wealth gains from hedge fund activism are partly wealth transfers from employees and taxpayers. We find that defined benefit employee pension plans of target firms experience underfunding after activism events. Our identification strategy is to use firm fixed effects, tests of the underlying mechanism and tests of alternative hypotheses. We find that employee pension plans suffer from underfunding due to reduced employer contributions to the plans. Our tests reject alternative hypotheses such as management’s voluntary reforms, activists’ stock-picking skills, and improvement due to mean-reversion. Our results point to a dark side of hedge fund activism in that the shareholder gains from activism partly come from (1) raiding deferred compensation explicitly promised to rank-and-file employees, and (2) taxpayers via the guarantee provided by PBGC.

Jul 31 | 3:00 pm to 4:00 pm

The Employee Clientele of Corporate Leverage: Evidence from Personal Labor Income Diversification

Presented by: Jie (Jack) He, University of Georgia
Co-Author(s): Tao Shu, University of Georgia, Huan Yang, University of Georgia

Using employee job-level data, we empirically test the equilibrium matching between a firm’s debt usage and its employee job risk aversion (“clientele effect”), as predicted by the existing theories. We measure job risk aversion for a firm’s employees using their labor income concentration in the firm, calculated as the fraction of the employees’ total personal labor income or total household labor income that is accounted for by their income from this particular firm. Using a sample of about 1,400 U.S. public firms from 1990-2008, we find a robust negative relation between leverage and employee job risk aversion, which is consistent with the clientele effect. Specifically, when a firm’s existing employees have higher labor income concentration in it, the firm tends to have lower contemporaneous and future leverage. Moreover, in terms of new hires, firms with lower leverage are more likely to recruit employees with less alternative labor income. Our results continue to hold after we control for firm fixed effects, other employee characteristics such as wages, gender, age, race, and education, and managerial risk attitudes. Further, the matching between a firm’s leverage and its workers’ labor income concentration in it is more pronounced for firms with higher labor intensity and those in financial distress.

Jul 31 | 4:00 pm to 5:00 pm

Credit and Punishment: Career Incentives in Corporate Banking

Presented by: Kristoph Kleiner, Indiana University
Co-Author(s): Janet Gao Indiana University and Joesph Pacelli, Indiana University, Please find link here:

This study examines the role of incentives in disciplining bankers' risk-taking and influencing loan performance in the market for corporate loans. In particular, we study the relationship between negative credit events (i.e., defaults, bankruptcies, and rating downgrades) and career turnover for loan officers underwriting syndicated loans. We construct a comprehensive dataset containing the identities and employment histories of nearly 1,500 loan officers employed by major corporate banking departments from the period spanning 1994 to 2014. We find that, following a negative credit shock in a loan officer's portfolio, the officer is more likely to depart her bank, transition to a lower-ranked bank, and face a demotion in the future. To ensure causality, we exploit variation in credit events due to collateral shocks to the underlying borrower. We also find that termination practices effectively incentivize loan officers to impose stricter lending terms on future loans (i.e., more covenants and greater covenant strictness). Our findings suggest that banks use negative credit events as signals to judge loan officer quality and that incentives help to reinforce proper monitoring in the privately placed debt market.

Aug 1 | 9:00 am to 10:00 am

Bankruptcy, Team-specific Human Capital, and Innovation: Evidence from U.S. Inventors

Presented by: Rui Silva, London Business School
Co-Author(s): Ramin Baghai, Stockholm School of Economics, Luofu Ye, London Business School

Abstract: This paper studies the impact of bankruptcies on the career and productivity of inventors in the U.S. We find that when inventor teams are dissolved because of bankruptcy, inventors subsequently become less productive. When, instead, inventor teams remain intact and jointly move to a new firm, their post-bankruptcy productivity increases. Consistent with the labor market recognizing the value of team stability, we find that the probability of joint inventor reallocation post-bankruptcy is positively associated with past collaboration. Our results highlight the important role of team-specific human capital and team stability for the production of knowledge in the economy, and shed light on the microeconomic channels by which the process of “creative destruction” operates.

Aug 1 | 10:00 am to 11:00 am

Technological Innovation and the Distribution of Labor Income Growth Rates

Presented by: Lawrence Schmidt, University of Chicago
Co-Author(s): Leonid Kogan, MIT, Dimitris Papanikolaou, Northwestern University, and Jae Song, Social Security Administration

Please see link, thanks!

Aug 1 | 11:30 am to 12:30 pm

Asset Pricing with Endogenously Uninsurable Tail Risks

Presented by: Anmol Bhandari, University of Minnesota
Co-Author(s): Hengjie Ai, University of Minnesota

This paper studies asset pricing in a setting where idiosyncratic risks in labor productivities are uninsurable due to limited commitment. Firms provide insurance to workers using long-term contracts but neither side can commit to these relationships. Under the optimal contract, sufficiently adverse shocks to worker productivity are uninsured. as firms cannot commit to negative net present value projects. In general equilibrium, exposure to down-side tail risks results in higher risk premia, more volatile returns and variation of returns across firms. The risk sharing patterns are also consistent with the observed cross-sectional variationheterogeneity in earnings and wealth sensitivities to aggregate shocks.

Aug 1 | 1:30 pm to 2:30 pm

Earnings Dynamics, Mobility Costs and Transmission of Firm and Market Level Shocks

Presented by: Thibaut Lamadon, University of Chicago
Co-Author(s): Magne Mogstad, University of Chicago, Bradley Setzler, University of Chicago

The goals of this paper are threefold. First, we quantify the extent to which firm and market level productivity shocks are transmitted to wages. Second, we recover the frictions or costs to worker mobility across firms and markets from the transmission of productivity shocks. And third, we examine the extent to which taxes and transfers, the family, and long-term contracts attenuate firm and market level shocks, and thereby, influence the incentives to and costs of worker reallocation across firms and markets.

Aug 1 | 3:00 pm to 4:00 pm

The Effect of Superstar Firms on College Major Choice

Presented by: Darwin Choi, Chinese University of Hong Kong
Co-Author(s): Dong Lou, London School of Economics and CEPR, Abhiroop Mukherjee, Hong Kong University of Science and Technology

We study the effect of superstar firms on an important human capital decision -- college students’ choice of major. Past salient, extreme events in an industry, as proxied by cross-sectional skewness in stock returns (or in favorable news coverage),are associated with a disproportionately larger number of college students choosing to major in related fields, even after controlling for the average industry return. This tendency to follow the superstars, however, results in a temporary over-supply of human capital. Specifically, we provide evidence that the additional labor supply due to salient, extreme events lowers the average wage earned by entry-level employees when students enter the job market. At the same time, employment size and employee turnover stay roughly constant in related industries, consistent with the view that labor demand is relatively inelastic in the short run. In the longer term, firms cope with the supply increase by gradually expanding the number of positions that require prior experience.

Aug 1 | 4:00 pm to 5:00 pm

Debt and Human Capital: Evidence from Student Loans

Presented by: Constantine Yannelis, New York University
Co-Author(s): Vyacheslav Fos, Boston College, Andres Liberman, New York University

This paper investigates the dynamic relation between debt and investments in human capital. We document a negative causal effect of the level of undergraduate student debt on the probability of enrolling in a graduate degree for a random sample of the universe of federal student loan borrowers in the US. We exploit exogenous variation in student debt induced by tuition increases that affect differentially students within the same school across cohorts. We find that $4,000 in higher debt causes a 1.5 percentage point reduction in the probability of enrolling in graduate school relative to a mean of 12%. Further results suggest this effect is largely driven by credit constraints, is monotonically weaker with family income, and is attenuated for students who had compulsory personal finance training in high school. The results highlight an important trade off associated with debt-financing of human capital, and inform the debate on the effects of the large and increasing stock of student debt in the US.

Aug 2 | 9:00 am to 10:00 am

Locked in by Leverage: Job Search during the Housing Crisis

Presented by: David Matsa, Northwestern University
Co-Author(s): Jennifer Brown, University of British Columbia

This paper examines how housing market distress affects job search. Using data from a leading online job search platform during the Great Recession, we find that job seekers in areas with depressed housing markets apply for fewer jobs that require relocation. With their search constrained geographically, job seekers broaden their search to lower-level positions nearby. These effects are stronger for job seekers with recourse mortgages, which we confirm using spatial regression discontinuity analysis. Our findings suggest that housing market distress distorts labor market outcomes by impeding household mobility.

Aug 2 | 10:00 am to 11:00 am

Angels, Entrepreneurship, and Employment Dynamics: Evidence from Investor Accreditation Rules

Presented by: Luke Stein, Arizona State University
Co-Author(s): Laura Lindsey, Arizona State University

This paper examines the effects of a shock to angel finance on entrepreneurial activity and employment. Using public micro data from the U.S. Census, we construct a state-level estimate of the fraction of accredited investors likely affected by Dodd-Frank’s elimination of housing wealth in the determination of accreditation status. We demonstrate that a larger reduction in the pool of potential angels negatively affects firm entry and reduces employment levels at small entrants. Employment increases at small and young incumbents as workers are absorbed, and wages for the startup sector decline. Angel finance appears to be a complement to organized venture capital and is more important in lower startup-capital-intensive and less concentrated industries. Our paper quantifies the impact of angel finance at the margin and offers insight on the geographies and sectors where it matters most.

Aug 2 | 11:30 am to 12:30 pm

The Equilibrium Value of Employee Ethics

Presented by: Brendan Daley, Duke University
Co-Author(s): Simon Gervais, Duke University

We propose a model in which employees differ in both skills and ethics. Employees receive a private, non-verifiable signal about the quality of their project, and decide whether or not to undertake it. Skilled employees lead more projects to success than unskilled ones. Ethical employees internalize the overall costs and benefits of a project whereas strategic employees make their decision based solely on personal rewards (i.e., future wages). Hence, both skills and ethics are valuable to firms, which is reflected in how employee wages vary with firms' beliefs about an employee's type given his history. The model's main tension comes from the fact that a strategic employee keeps the option of showcasing his skills when he undertakes a project whereas, since ethical employees drop all negative-NPV projects, he improves his ethical capital when he drops a project. We characterize equilibrium employee decisions and wages and derive comparative statics, first in a one-period model with exogenous wages and then in a two-period model that endogenizes the value of skills and ethics. An inefficient equilibrium emerges when ethics are not prominent or skills are highly valuable to firms. In this equilibrium, skilled employees undertake more negative-NPV projects than their unskilled counterparts, as they rely on their skills to recoup the bad information they initially receive. In this way, the presence of ethics among some employees disciplines the behavior of strategic ones to make decisions more aligned with overall value. Because the disciplining effect is stronger on low-skill employees, the need for interventionist governance solutions is reduced.