Firing Costs and Capital Structure Decisions

67 Pages Posted: 16 Feb 2014 Last revised: 5 Mar 2016

Date Written: February 10, 2016

Abstract

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.

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

JEL Classification: G32, G33, J63, K31

Suggested Citation

Serfling, Matthew, Firing Costs and Capital Structure Decisions (February 10, 2016). Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2396599 or http://dx.doi.org/10.2139/ssrn.2396599

Matthew Serfling (Contact Author)

University of Tennessee ( email )

Haslam College of Business
Knoxville, TN 37996
United States
865-974-1952 (Phone)

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