Employee Deposit Programs

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

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?)

8. 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