The Employee Deposit Program in Japan is a form of shadow banking that allows firms to collect demand deposits from their employees. Firms face the threat of runs as the program is not monitored by regulators and is not subject to the protection of deposit insurance. We seek to show that the threat of runs causes firms to use timely loss recognition as a commitment device to mitigate depositors’ concerns regarding firm risk. Such an effect is expected to be more pronounced than that of external bank debt. Furthermore, the timely loss recognition effect of employee deposits may concentrate in firms that (a) are not associated with implicit guarantees by main banks, (b) have a high default probability, (c) have weak bonding between employees and employers, and (d) rely on external financing.