Labor Protection Laws and Bank Loan Contracting
Posted: 30 Dec 2012 Last revised: 6 Aug 2014
Date Written: August 5, 2014
This paper examines the impact of labor regulations that restrict firms’ flexibility to adjust labor on the cost of corporate bank loans. Using within-country variation in employment protection legislation across 25 countries, I find that increases in employment protection lead to higher loan spreads, as well as tighter nonprice loan contract terms and more diffuse loan ownership structure. The effects of labor regulations are greater in industries with higher rate of labor turnover and among borrowers with higher probability of default. These results suggest that rigidities imposed by labor regulations have a significant impact on the firms’ cost of capital.
Keywords: labor laws, bank loans, law and finance
JEL Classification: G21, G18, K31
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