A credit warning can spook employees

Martin Daks | Feb 25, 2020

Sections Finance

When a company’s credit rating deteriorates, employees start networking.

At companies for which a rating downgrade is likely, employees increase their contacts on LinkedIn, in a potential bid to insure against worsening conditions at work, according to Harvard PhD candidate Jeff Gortmaker, Chicago Booth’s Jessica S. Jeffers, and the New York Federal Reserve Bank’s Michael Junho Lee

The researchers used anonymized data from LinkedIn, the online professional networking platform with more than 645 million global users. To analyze employee connections, employment histories, and other characteristics, they tapped LinkedIn’s Economic Graph Challenge program, which provides data to researchers studying economic issues. 

Because networking links between platform users are time-stamped at the time of creation, Gortmaker, Jeffers, and Lee were able to measure average weekly connection rates for employees at every publicly held company represented in their sample. (They calculated the total connections made by employees of the company in a given week and divided by the company’s total number of employees.) Additionally, since employment histories contain company names and dates of employment, along with standardized information on positions held, such as seniority level and occupation type, the researchers could examine connection rates by seniority, occupational skill, and occupational mobility.

They focused on workers’ responses to downwatches—or announcements that precede a likely or impending corporate credit rating downgrade by Standard and Poor’s or Moody’s. In the weeks following a downwatch announcement, there was a significant increase in networking efforts for workers at the affected companies. Skilled employees tended to connect more than others, and the reactions to downwatches were stronger as seniority increased. 

Some workers ended up leaving the company within the coming year, and others stayed. People in both groups increased their LinkedIn connections, according to the researchers, who argue that the spike in networking among employees who stuck with the company indicated that they were cultivating outside options as a way to hedge against worsening financial conditions.

In addition to analyzing the effects of downwatches, the researchers examined responses both to other negative signals, such as missed earnings reports, as well as to positive signals, including upwatches. But none generated significant reactions. 

Employees may react to negative signals even if a company is far from bankruptcy, the findings suggest. Moreover, businesses that take on debt bear a unique labor cost, as companies financed entirely by equity don’t have to worry about how employees will react to a downwatch or downgrade.