From debt breaches to employee safety: The hidden power of banking interventions

Abstract

This study investigates the influence of bank interventions following breaches of debt covenants on workplace safety. Using a regression discontinuity design, we find robust evidence indicating a substantial decrease in employee injuries after covenant violations. Our channel analysis reveals that the impact of bank interventions is more pronounced when banks perform well in ESG-related employee relationships and take on less risk. Furthermore, the influence of bank interventions is stronger when banks have considerable control over firms and when employees have strong bargaining power. Our findings demonstrate that creditors play an active role in enhancing workplace safety, leading to improved employee welfare. The implications of our research highlight the potential for financial institutions to contribute to socially responsible practices and promote sustainable and safe working environments.