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Employment protection laws and corporate cash holdings

journal contribution
posted on 03.12.2019 by Ahmet Karpuz, Kirak Kim, Neslihan Ozkan
We study how employment protection laws (EPLs) affect corporate cash-holding decision. By exploiting within-country changes in EPLs across 20 OECD countries as a source of variation in labor adjustment costs, we show that following an increase in the stringency of EPLs, firms’ cash holdings increase significantly. This relationship is stronger for firms with high labor turnover, no multinational presence, or financial constraints, indicating that labor adjustment cost raising distress risk is the mechanism in play. Cash buffers created by firms faced with stricter EPLs help them mitigate the under investment problem in subsequent episodes of industry-wide distress. Consistent with this precautionary motive, the market’s valuation of excess cash is positively associated with the EPL strictness. We further demonstrate that the response of cash policy to changes in EPLs is distinct from that of debt policy or investment policy. Our evidence highlights the role of interaction between labor market and financial frictions in determining the level and the value of corporate cash.

History

School

  • Business and Economics

Department

  • Business

Published in

Journal of Banking & Finance

Volume

111

Publisher

Elsevier BV

Version

AM (Accepted Manuscript)

Rights holder

© Elsevier

Publisher statement

This paper was accepted for publication in the journal Journal of Banking & Finance and the definitive published version is available at https://doi.org/10.1016/j.jbankfin.2019.105705

Acceptance date

19/11/2019

Publication date

2019-11-21

Copyright date

2020

ISSN

0378-4266

Language

en

Depositor

Dr Ahmet Karpuz (Deposit date: 2 December 2019

Article number

105705

Exports