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

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review

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Original languageEnglish
Pages (from-to)302–347
Journal / PublicationReview of Corporate Finance Studies
Issue number2
Online published21 Jun 2019
Publication statusPublished - Sep 2019


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.