Firing Costs and Capital Structure Decisions

Matthew A. Serfling

University of Arizona - Department of Finance

April 28, 2014

I exploit the passage of wrongful discharge laws by U.S. state courts that allow workers to sue employers for unjust dismissal as an exogenous increase in employee firing costs. I find that firms reduce debt ratios following the adoption of these laws, and this result is strongest for subsamples of firms that experience larger increases in expected firing costs. Following the passage of these laws, firms also increase cash holdings, firms save more cash out of cash flows, and investors place a higher value on each additional dollar of cash holdings. Overall, my results indicate that employee firing costs can have an important impact on corporate financial policy decisions.

Number of Pages in PDF File: 62

Keywords: Capital structure, Cash holdings, Firing costs, Layoffs, Labor laws

JEL Classification: G32, G33, J63, K31

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Date posted: February 16, 2014 ; Last revised: April 29, 2014

Suggested Citation

Serfling, Matthew A., Firing Costs and Capital Structure Decisions (April 28, 2014). Available at SSRN: http://ssrn.com/abstract=2396599 or http://dx.doi.org/10.2139/ssrn.2396599

Contact Information

Matthew A. Serfling (Contact Author)
University of Arizona - Department of Finance ( email )
McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States
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