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Is Corporate Credit Risk Propagated to Employees?

Filipe Correia, Gustavo Cortes and Thiago Silva

No 551, Working Papers Series from Central Bank of Brazil, Research Department

Abstract: Using an administrative credit registry for individuals merged with matched employer-employee data, we investigate whether a firm’s credit risk affects its employees’ access to credit. We find that employees of companies that suffer credit rating downgrades have access to 20 percent less credit and face 10 percent higher interest rates compared with similar employees of non-downgraded firms. Workers from downgraded firms are also 5 p.p. more likely to default on loans than employees from unaffected firms. These adverse financial effects have real consequences, with employees cutting consumption by 9 percent following downgrades of their employers. Our results suggest that banks process information on the financial health of employers when pricing consumer credit.

Date: 2021-06
New Economics Papers: this item is included in nep-ban and nep-cfn
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