Firing Costs and Capital Structure Decisions
University of Tennessee
February 10, 2016
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, with this result 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. Overall, these results are consistent with higher firing costs crowding out financial leverage via increasing financial distress costs.
Number of Pages in PDF File: 67
Keywords: Capital structure, Firing costs, Employment protection, Financial distress costs
JEL Classification: G32, G33, J63, K31
Date posted: February 16, 2014 ; Last revised: March 5, 2016
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