What do Apple, General Motors, Marvel Entertainment, and fast food chain Sbarro have in common? At one point in their existence, all of these companies have gone bankrupt.
But while these and other organizations often bounce back, the toll corporate bankruptcy takes on employees and their future earning potential is often overlooked. This is an issue Jiaping Qiu, Professor, Finance and Business Economics, and CIBC Chair in Financial Markets, pays close attention to.
“A large portion of human capital is tied to the company, so if the company goes bankrupt there goes its company-specific human capital,” Qiu says. “That’s why this research is important: It has implications in how employees will invest their human capital in a company, and what, as a result, companies should consider when making corporate finance decisions.”
In one study, Qiu and his research team found that corporate bankruptcy leads to a significant reduction in employee earnings. What’s most surprising, he says, is how long bankruptcy affects a company in this sense.
“Annual employee earnings deteriorate by 10 per cent when a firm files for bankruptcy,” he explains. “Workers who are affected are likely to leave the firm, industry and even the local labour market. And it turns out those employee earnings remain below pre-bankruptcy earning for at least six years, which is surprising.”
With many bankruptcies often caused by financial distress (when promises to creditors of a company are broken or honoured with difficulty), it is important to keep in mind, says Qiu, that employees’ lifetime earnings are closely tied to the financial health of the companies for which they work.
Recent research, he says, shows that while people may not check a company’s credit history, they do – whether consciously or subconsciously – pay attention to the financial health of companies when they are searching for jobs.
“If people get two job offers, all things being relatively equal, they are likely to accept the one from the firm that is more financially healthy,” Qiu says. “This means companies with worse credit ratings will have to pay more to attract the same quality of workers. The resulting higher wages paid to workers due to greater bankruptcy risk should be an important factor for a company to consider when it plans to increase its debt level.”
Another area impacted by a company’s corporate finance decisions, says Qiu, is innovation, as it is a long-term and risky process. Innovators who are interrupted by financial policy, he says, are also less likely to invest their human capital again.
Qiu, who has been the CIBC Chair in Financial Markets at DeGroote since 2012, also researches a broad range of other topics. For example, his work has explored the relationship between labour unions and creditors. Most recently, he has studied technology conglomeration, strategic alliances and corporate innovation.
“We looked at technology conglomerates such as Amazon, Google, and Facebook,” says Qiu, of his latest research. “We are trying to understand how these technology conglomerates differ from traditional product conglomerates in terms of their business strategies and what determines the boundaries of these firms.”
Jiaping Qiu has broad research interests related to corporate finance, capital markets, and household portfolio choice. His current projects include liquidity in CDS market, competition in the mutual fund industry, and human capital loss in corporate bankruptcy.