Labor Protection Laws and Bank Loan Contracting

Posted: 30 Dec 2012 Last revised: 6 Aug 2014

Date Written: August 5, 2014

Abstract

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

Suggested Citation

Alimov, Azizjon, Labor Protection Laws and Bank Loan Contracting (August 5, 2014). Journal of Law and Economics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2194362 or http://dx.doi.org/10.2139/ssrn.2194362

Azizjon Alimov (Contact Author)

City University of Hong Kong ( email )

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