Firing Costs and Capital Structure Decisions

Matthew Serfling

University of Tennessee

September 10, 2015

Journal of Finance, Forthcoming

I exploit the adoption of state-level labor protection laws as an exogenous increase in employee firing costs to examine how the costs associated with discharging workers affect capital structure decisions. I find that firms reduce debt ratios following the adoption of these laws and that this result is stronger for firms that experience larger increases in firing costs. I also document that, following the adoption of these laws, a firm’s degree of operating leverage rises, earnings variability increases, and employment becomes more rigid. These results are consistent with higher firing costs crowding out financial leverage via increasing financial distress costs.

Number of Pages in PDF File: 66

Keywords: Capital structure, Firing costs, Employment protection, Financial distress costs

JEL Classification: G32, G33, J63, K31

Open PDF in Browser Download This Paper

Date posted: February 16, 2014 ; Last revised: September 11, 2015

Suggested Citation

Serfling, Matthew, Firing Costs and Capital Structure Decisions (September 10, 2015). Journal of Finance, Forthcoming. Available at SSRN: http://ssrn.com/abstract=2396599 or http://dx.doi.org/10.2139/ssrn.2396599

Contact Information

Matthew Serfling (Contact Author)
University of Tennessee ( email )
Haslam College of Business
Knoxville, TN 37996
United States
865-974-1952 (Phone)
Feedback to SSRN

Paper statistics
Abstract Views: 1,302
Downloads: 418
Download Rank: 45,331

© 2015 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo1 in 0.579 seconds