RUI: The Impact of Firm Financial Performance and BankruptcyRisk on Safety Investment

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Safety has become an increasingly important public policy consideration. With enactment of the Environmental Protection Act and the Occupation Safety and Health Act in 19970, a healthy and safe work place became a national goal. The purpose of this project is to analyze how a firm's financial performance affects work place safety. In particular, a model is developed showing how a firm's incentives for preventing accidents depends on its financial situation. The possibility of bankruptcy means that optimal safety investments depend on such financial variables as expected profits, debt burden, ability to sell assets, and expected future profits. It is shown that it is impossible to determine analytically the direction and magnitude the effect of these factors have on investments in safety. Answers must be determined empirically. This project will provide empirical estimates of the relationship between a firm's financial condition and its investment in work place safety using two plant-level proxies for safety performance form OSHA records: lost workdays and violations of safety standards. This research is important because it will have important public policy implications, most notably for the efficient allocation of regulatory resources and policies towards highly leveraged transactions.