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