A growing amount of literature documents that binding financial constraints during economic distress or financial distress, including impending bankruptcy, can have an adverse effect on firms’ human capital. During economic distress, firms suffering from financial constraints might dismiss short-tenured employees with high future expected productivity due to their relatively low severance pay (Caggese, Cuñat and Metzger, 2019). On the other hand, workers with the highest cognitive and non-cognitive skills might also leave financially distressed firms voluntarily (Baghai, Silva, Thell, and Vig, 2016), while talented job applicants might be reluctant to join (Brown and Matsa, 2016).

In our recent paper entitled ‘Corporate Financial Constraints and Employee Mental Health’, we document a novel cost of financial constraints on firms’ human capital: we provide evidence that financial constraints during an episode of economic distress can have an adverse effect on employee mental health. Deteriorating employee mental health is not only a personal concern of employees but also a concern for firms as mental health is an important determinant of labor productivity. To study the effects of financial constraints on employee mental health, we build a rich dataset based on administrative microdata from the Netherlands that links firm-level financial data to employee-level antidepressant use. Antidepressants are frequently prescribed as a first line of treatment for mental health complaints including major depression disorder and anxiety disorders as well. To identify the causal effects of financial constraints, we exploit variation in firms’ need to refinance their long-term debt in 2008, a period when refinancing became more difficult due to the credit crunch. The Netherlands is an ideal laboratory for this exercise as the country experienced a strong negative bank credit supply shock in 2007-2008, and bank lending is the main source of external financing for Dutch firms.

We find that employees of firms that had to repay a higher share of their long-term debt in 2008—at least 25% of their outstanding long-term debt in our baseline specification—exhibited a 0.44 percentage points higher average probability of antidepressant use in the 2008-2012 period. This is an economically significant 9% increase with respect to the 5% average probability of antidepressant use in our sample.

A possible channel from financial constraints to deteriorating employee mental health is job loss or the threat of job loss. Several studies have documented that the credit crunch associated with the Global Financial Crisis had a negative effect on employment levels. We also find that employees of firms that had to repay a higher share of their long-term debt in 2008 had a 6.2 pp higher probability of job separation in the 2008-2010 period, whereas employees of these firms did not exhibit different turnover prior to the crisis.

While job loss is a potential transmission channel for employees who actually lost their jobs due to the binding financial constraints, the increasing threat of job insecurity could have also had an adverse mental health effect on employees who eventually managed to keep their positions. Arguably it is the mental health burden on this latter group that is of greater concern for employers given employee mental health’s role in labor productivity. We separately study this sub-sample of employees and estimate an average treatment effect on the probability of antidepressant use in the 2008-2012 period of 0.28 pp. This result indicates that much of the 0.44 pp total treatment effect accumulated at employees who managed to keep their job. 

Treatment heterogeneity estimates also support the argument that job insecurity is a driver for greater antidepressant use for employees who stayed in their jobs. Based on the relevant economics and psychology literature we identify five personal/household characteristics that are expected to increase the mental health burden of job insecurity: older age, being male, having no partner, having children in the household, and having a salary that constitutes the larger part of the household income. When we interact our treatment indicator with these moderator characteristics, we find statistically significantly larger treatment effects for employees without a partner, those with at least one child in their household, and for employees whose salary constitutes a large share of their total household income. Treatment effects appear to be larger for employees who are at least 45 years old, but the difference is not statistically significant at any conventional level, whereas male and female employees appear to be similarly affected.

Our study contributes to two broad lines of literature. First, a growing literature in finance studies the effects of financial constraints on firms’ human capital. We combine firm-level financial data with rich employee-level data on antidepressant use to document a novel cost of financial constraints, their detrimental effect on employee mental health. We show that the mental health toll of financial constraints is not restricted to dismissed employees but is also substantial for employees who stay with the firm. As argued above, the mental health of employees, particularly of those not dismissed, should be a prime concern of firms due to mental illnesses’ burden on employee productivity.

Second, a large body of literature examines the health effects of financial and economic crises, and among other findings reports a negative correlation between unemployment rates and mental health status. We also study how employment relations contributed to the mental health of employees during a crisis period, but contrary to the previous literature, we use employer-employee matched data to disentangle the mental health effects of the financial crisis (credit supply shock) from the effects of the ensuing economic crisis (the Great Recession). Furthermore, we show that crisis periods may have an adverse mental health effect even on employees who manage to keep their jobs but who may suffer from decreased perceptions of job security.

Dániel Kárpáti is a PhD Student at the Department of Finance, Tilburg University.

Luc Renneboog is a Professor of Corporate Finance, Tilburg University, and a research member of the European Corporate Governance Institute (ECGI).