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Labor Protection and Leverage

Simintzi, E., Vig, V. and Volpin, P. (2015). Labor Protection and Leverage. The Review of Financial Studies, 28(2), pp. 561-591. doi: 10.1093/rfs/hhu053

Abstract

This paper exploits inter-temporal variations in employment protection across countries and finds that rigidities in labor markets are an important determinant of firms’ capital structure decisions. Over the 1985-2007 period, we find that reforms increasing employment protection are associated with a 187 basis point reduction in leverage. We interpret this finding to suggest that employment protection increases operating leverage, crowding out financial leverage. This result is robust across measures of employment protection and leverage, and does not appear to be due to pre-treatment differences between treated and control firms, omitted variables, unobserved changes in regional economic conditions, and reverse causality. Heterogeneous treatment effects are consistent with our economic intuition: we find that the negative effect is more pronounced in firms that are subject to frequent hiring and firing.

Publication Type: Article
Publisher Keywords: labor regulation, capital structure, tangibility, operating leverage
Subjects: H Social Sciences > HD Industries. Land use. Labor
Departments: Cass Business School > Finance
URI: http://openaccess.city.ac.uk/id/eprint/7771
[img] Text - Accepted Version
This document is not freely accessible due to copyright restrictions.

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