Criminals, Bankruptcy, and Cost of Debt

TL;DR

Hiring employees with criminal records is associated with increased firm risk and higher likelihood of bankruptcy.

Transcript

welcome everyone to uh session five uh we're excited to um have uh paper criminals bankruptcy and cost of debt uh by morton from copenhagen uh martin you'll have 15 minutes uh i'll give you a three minute warning and then a maria from london school of economics will be discussing the paper for 15 minutes and just to reiterate what ann said if i'll ... Read More

Key Insights

• 💁 Employee characteristics, including criminal records, provide information about a firm's risk.
• ✋ Hiring employees with criminal records is associated with a higher probability of bankruptcy.
• ✳️ Employee decision-making and peer effects contribute to a firm's risk.
• ☠️ Firms with CEOs who have criminal records tend to pay higher interest rates.
• 🪈 The implications of hiring employees with criminal records have both positive and negative aspects.
• 🪈 The removal of criminal records from public records after a certain period can lead to unknowing hiring of employees with criminal records.
• 👨‍🔬 The study highlights the need for further research on employee characteristics and their impact on firm risk.

Questions & Answers

Q: How do employee characteristics, such as criminal records, influence a firm's risk?

Employee characteristics can impact firm risk in various ways. Employees with criminal records may make riskier decisions, influence their co-workers to engage in risky behavior, or fail to discipline managers from making risky decisions.

Q: Are employee characteristics priced by the firm's lenders?

The study finds that firms with CEOs who have criminal records tend to pay higher interest rates. However, there is inconsistent evidence regarding the pricing of employees' criminal records by lenders.

Q: Could hiring employees with criminal records have positive effects for firms?

While the study focuses on the negative effects of hiring employees with criminal records, there could be potential positive effects, such as increased innovation or tapping into a broader talent pool. However, the welfare implications of hiring employees with criminal records are complex and depend on various factors.

Q: How do firms in Denmark conduct background checks on potential employees?

Firms in Denmark do conduct background checks, but due to the removal of criminal records from public records after a certain period, some employers may hire employees with criminal records unknowingly. The study explores the possibility of firms hiring employees with criminal records without being aware of it and finding consistent results.

Summary & Key Takeaways

• The study examines whether employee characteristics, specifically criminal records, provide information about a firm's risk and whether they are priced by the firm's lenders.

• Using data from private firms in Denmark, the study finds that firms with CEOs and employees with criminal records have a higher probability of bankruptcy.

• The study suggests that employees with criminal records can directly influence a firm's risk through their decision-making and indirectly through peer effects. It also highlights the importance of employee characteristics in assessing a firm's risk.