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Abstract

Given the growing economic and strategic importance of human capital, examining the relationship between firms and labor is crucial for academics, practitioners and policymakers. Unlike capital, labor has unique features. Employees not only make strategic decisions and allocate or withdraw effort, but they also have the freedom to move across firms. This
mobility, along with the strategic roles employees play, contrasts with the more static nature of capital. Moreover, a unique set of frictions induced by employment protection laws is present in labor markets, which in turn impacts firms’ decisions and their behaviors in the product market.

The labor and finance literature starts with recognizing the interdependency between firms and labor. On the one hand, firm decisions can significantly affect their workers. For instance, financing projects with excessive debt may heighten the risk of financial distress, potentially leading to layoffs. Additionally, firms’ decisions to invest in technology can directly affect workers by altering the demand for labor and changing compensation structures. On the other hand, labor market attributes also influence firm decisions, affecting product market behavior and impeding their capacity to expand. In this thesis, I include three empirical essays that provide new insights into the intersection of labor and finance from different angles.

Chapter 1 provides insights into how corporate social responsibility (CSR) affects firms’ behavior, with a focus on the interaction of labor and CSR. Using a unique panel of target firms in European countries, I investigate post-merger employment policies of socially responsible firms. Surprisingly, I find that acquirers with greater CSR performance are more likely to lay off employees in target firms. My findings are primarily driven by the Social component of the CSR rating. I further document a positive impact of acquirers’ social performance on target firms’ labor productivity, technical efficiency, and staff costs. In addition, I show that socially responsible firms enjoy higher announcement returns, especially when they do more layoffs. These results are consistent with the cost-saving channel: higher labor costs induced by the implementation of CSR policies decrease the optimal level of employment in acquired targets. Overall, my paper suggests that socially responsible firms do not lose sight of value maximization when making layoff decisions.

Chapter 2 contributes to the literature on business groups by connecting it to labor market issues. In particular, we provide evidence that business groups are partially insulated from the impact of employment protection legislation due to their ability to operate internal labor markets. A major 2012 reform lowering dismissal costs in Spain stimulated employment growth in stand-alone firms significantly more than in comparable group-affiliated firms. Response to the reform was most muted in group firms that were in a position to better access their internal labor market, e.g., due to geographic proximity to their affiliates. We also provide causal evidence that group affiliation became less pervasive in Spain following the reform, in line with longstanding claims that labor market frictions shape the organizational structure and favor the emergence of business groups.

Chapter 3 examines how ownership changes in response to the presence of labor market issues. We provide evidence suggesting that common owners play an important role in bypassing frictions to employee mobility that hinder information sharing across firms. Based on this, we introduce a different perspective to the literature and ask: What are the driving forces behind endogenous common ownership? We study the effects of knowledge protection on common ownership by exploiting the staggered adoption of the Inevitable Disclosure Doctrine (IDD), which is a trade secret law that limits knowledgeable workers’ mobility across firms. We find that the recognition of IDD causes an increase in firm-level common ownership, suggesting that common ownership helps overcome labor market frictions via facilitating information flows. The effect is mainly led by long-term investors, and it is stronger for firms that rely more on human capital and for firms with more mobile employees. Our findings shed light on the efficiency-improving hypothesis of common ownership - in the presence of IDD, an exogenous increase in common ownership can help firms conduct more innovation activities and enjoy better operating performance. In summary, this paper provides direct evidence that the need for information sharing serves as an important motive for the emergence of common ownership.

Publication Type:	Thesis (Doctoral)
Subjects:	H Social Sciences > HG Finance
Departments:	Bayes Business School > Bayes Business School Doctoral Theses Bayes Business School > Finance Doctoral Theses

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