Corporate Reorganization as Labor Insurance in Bankruptcy

How does corporate reorganization affect labor reallocation in bankruptcy? In this paper, we provide evidence that reorganization is an important source of labor insurance against bankruptcy shocks, including for workers who eventually move to other firms. We measure the effect of reorganization on labor outcomes using data from Portugal and the random allocation of corporate reorganization cases to judges, which creates exogenous variation in the probability of reorganization. Reorganized firms only keep about 20% of their workforce five years after reorganization. We also find no evidence that reorganization affects the reallocation of workers to efficient of profitable firms. However, reorganization has a positive and persistent effect on wages. In the short term (first year after reorganization), workers are more likely to have jobs. In the longer term (subsequent five years), workers have higher paying jobs. Consistent with the literature on the scarring effect of negative production shocks, reorganization reduces labor transitions to less skill intensive occupations with lower wage premia. Finally, we show that reorganization provides labor insurance to workers who move to new employers. Reorganization reduces the probability that workers move to low-paying jobs but increases the probability that they find high-paying jobs in new employers