Employee Inside Debt and Firm Risk-Taking: Evidence from Employee Deposit Programs in Japan

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 been historically widely used in Japan. For a sample of 2,104 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.

Keywords: inside debt, risk-taking, employee deposits, agency costs of debt

JEL Classification: G30, G32, J01

Suggested Citation: Suggested Citation

Dasgupta, Sudipto and Lin, Yupeng and Yamada, Takeshi and Zhang, Zilong, Employee Inside Debt and Firm Risk-Taking: Evidence from Employee Deposit Programs in Japan (June 25, 2019). Review of Corporate Finance Studies, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2438504 or http://dx.doi.org/10.2139/ssrn.2438504