Employee inside debt and firm risk-taking: Evidence from employee deposit programs in Japan

Sudipto Dasgupta, Yupeng Lin, Takeshi Yamada and Zilong Zhang

Forthcoming, Review of Corporate Finance Studies

Unlike broad-based equity ownership by employees, ownership of company debt by rank-and-file employees has not received much attention. We argue that company debt held by employees in the form of in-company deposits can monitor risk-taking and facilitate risk discovery. Employee deposits have historically been widely used in Japan. For a sample of 2104 Japanese firms, using an identification strategy that utilizes a new law in 2003 that changed the priority of employee deposits in bankruptcy and led to large scale withdrawals of employee deposits, we find that employee deposits mitigate firms’ risk-taking behavior and reduce the agency cost of debt.

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