A new study shows that when firms are in distress, they are less likely to attract applicants. The authors, Jennifer Brown, Northwestern University and NBER, and David A. Matsa, Northwestern University, believe their research has implications on the ways companies pursue new opportunities, invest, and think about risk.
“A company’s financial condition has far-reaching effects on the firm, including on its
ability to attract and retain human capital. Corporate financial insecurity can lead current
employees to search for more stable positions and new recruits to focus their searches elsewhere,” they write. “Unless distressed firms can offer a sufficient compensating wage premium, they may have difficulty recruiting new talent, particularly for positions that require firm-specific investments.”
But, because distressed companies don’t necessarily have the ability to pay a premium for top talent, they can get caught in a vicious cycle, wherein poor strategy forces a them to hire insufficient or inexperienced talent, which leads to yet more poor performance.
This is why companies need to include the potential impact on human capital in risk assessments regarding new projects or investments.
Brown and Matsa analyzed data from a number of sources – job board postings, surveys, credit default swap prices, and more. And they found that when a company’s performance is week, job seekers are more likely to look elsewhere. In fact, job seekers were more knowledgable about a the market than expected. “Consistently, we find that job seekers’ perceptions are highly positively correlated with firms’ true financial health,” they write.
They explain, “We find that firms attract significantly fewer applications per job opening during periods of corporate distress. On average, about 20% fewer job seekers apply to a given position for each 10-percentage-point increase in the firm’s probability of default (as indicated by its CDS price).”
And the job seekers who do apply expect a salary premium to work at a distressed firm: “we find that advertised salaries, if anything, increase when a firm is in distress—consistent with distressed firms paying a compensating differential to offset a decrease in labor supply.”
Additionally, they also found that job seekers are more likely to apply for jobs at a troubled company if it is in a state that has a better social safety net, like better unemployment benefits. They also found that people with more specialized job skills are less likely to apply to troubled firms.
Finally, they found that people who command a higher salary are also less likely to apply for jobs at a company in distress. “The results suggest that distressed firms struggle to attract high-quality applicants to open positions. An increase in CDS price is associated with a statistically significant decline in applicants’ ZIP codes’ earnings – a rough measure of applicants’ past earnings and ability,” they explain.
All of this points to a way that people manage risk – and how companies need to be prepared to respond to it when considering human capital needs.
Risk and Human Capital
Brown and Matsa believe their research should create an incentive for firms to consider the long-term implications for risky decisions. They should think beyond potential negative impact on stock prices, and consider how engaging in risky corporate behavior can influence the kind of talent they are able to attract and retain. They write, “…our results imply that labor market frictions are an important consideration for corporate decisions related to risk taking – decisions including financial, operational,
innovation, and growth strategies.”
“The labor-related costs that we study provide firms with a strong incentive to avoid financial distress. Firms can abate these costs in various ways. Most directly, firm can reduce leverage and choose more conservative financial policies. Firms can also reduce the probability of distress by reducing operating leverage or by taking less risky projects, or can mitigate workers’ costs of distress by redesigning job tasks to require fewer firm-specific skills.”
The study points to an important factor in the way companies engage in strategic planning that has long gone ignored. Leaders need to think about how they perform can impact the ability of their firm to manage human capital appropriately.