Discussion of Dasgupta-Lin-Yamada-Zhang: Employee Inside Debt and Firm Risk-Taking: Evidence from Employee Deposit Programs in Japan Cambridge, August 2013 Moqi Xu, LSE 1

2 Employee Deposit Programs “company run program that …allows participating employees to …deposit their money in the company as an interest bearing assets.” Governance Historically considered part of firms’ employee welfare programs Governed by labor law Terms Deposit through payroll deductions “Legal obligation to return savings to the workers upon request without delay” Only partly secured Prevalence Common in Japan: 10% of all firms 8% of debt in the 70s, 4% in the 00s

3 This paper Uses a law change that determines the priority of employee deposits in bankruptcy Effective in 2003 Limits secured employee deposits to max (past 6 months salary; 1/3 of existing deposits) Higher cancellation rates of EDP programs after 2003 (and in magnitudes?) Shows that More EDP deposits  lower risk (total, systematic, and idiosyncratic) After 2003 x EDP program existing in 2002  higher risk Effect is concentrated in non-Keiretsu firms Weakly significant positive relation between deposits and leverage Weakly significant negative relation between investment in high-EDP high-volatility firms Explains that Employees-debtholders make the firm take less risk Employees have more inside information and signal low risk to outside debtholders Reduction in risk-taking and employee welfare program could both be designed to increase loyalty

4 The perspective of the employee Why would an employee participate in an EDP? Risk? Better information (vs regulated bank)? Show their loyalty (retention)? Higher interest rates

5 The perspective of the firm Why would a firm offer an EDP at a higher cost than comparable options? HR reasons Cheap compensation? (risk) Retention? (vs short term) Attract risk-averse employees? (vs contracts) Aligned interests? (vs equity) Promote loyalty and trust? Collective bargaining (less likely to run since it will jeopardize their jobs) – but EDP are unsecured Risk-taking Signaling  lower cost of debt

6 Risk-taking Paper shows that firms with (larger) EDPs take less risk Two possible channels: Decision makers hold EDPs and therefore have less incentive to take risk (cf management inside debt literature) Management promises employees to take less risk (but what is the commitment channel?) Which one is it? Who participates in EDPs? What are the risks taken? Is the effect more pronounced for firms with flatter hierarchies?

7 Monitoring and the cost of debt Paper argues that employees have inside information (small firms?) EDP are short-term: employees can “run” (is that in their interest?) Runs are visible to outside investors (how? Media?) Therefore, EDP firms have an incentive to prevent runs by reducing risk Predictions Runs in distress Cost of outside debt is lower for EDP firms EDP firms can take on more leverage (shown by the paper: but mechanical effects?)

Conclusion Interesting paper about a form of „financing“ little known outside Japan Very careful and convincing econometrics and empirical setting To make more general statements about employee financing, it would be nice to disentangle effects over and above literature on managerial inside debt 8