Employment Protection Laws and Privatization
Indian School of Business (ISB), Hyderabad
William L. Megginson
University of Oklahoma
March 15, 2012
Is privatization in a country related to the stringency of its employment protection laws (EPL) — and, if so, how? On one hand, stringent EPL may reduce investor demand for state-owned enterprises (SOEs) by imposing restrictions on retrenchment of employees. On the other hand, stringent EPL may lead governments to increase the supply of privatizeable SOEs if they lower union opposition to privatization by reducing fears of employee retrenchment. Using privatization deals in fourteen European countries from 1978-2003 and all the changes in EPL within a country, we find strong evidence that the strength of EPL is negatively correlated with privatization. Using a variety of tests that account for the potential endogeneity of EPL, we show that it is plausible to conclude that stringent EPL deter privatization. Our study contributes to the law and finance and privatization literatures by being the first to examine the effect of country-level employment legislation on privatization.
Number of Pages in PDF File: 51
Keywords: Employment protection, labor laws, privatization
JEL Classification: G15, G38, J8, K31, L33working papers series
Date posted: March 18, 2012
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