Employment Protection, Investment, and Firm Growth

Review of Financial Studies, Forthcoming

81 Pages Posted: 19 Dec 2015 Last revised: 25 Apr 2019

See all articles by John (Jianqiu) Bai

John (Jianqiu) Bai

Northeastern University - D'Amore-McKim School of Business

Douglas J. Fairhurst

Washington State University

Matthew Serfling

University of Tennessee

Date Written: October 1, 2018

Abstract

We exploit the adoption of U.S. state-level labor protection laws to study the effect of employment protection on corporate investment and growth. We find that, following the adoption of these laws, capital expenditures decrease, resulting in firms growing sales at a slower rate. Our findings are consistent with theories predicting that greater employment protection discourages investment by making projects more irreversible. Supporting this theoretical channel, following negative cash flow shocks, firms are less likely to downsize operations in states that have adopted these laws but more likely to downsize operations in states that have not adopted these laws.

Keywords: Employment protection, Investment, Capital expenditures, Sales growth, Labor laws, Investment irreversibility

JEL Classification: G31, G33, J63, K31

Suggested Citation

Bai, John (Jianqiu) and Fairhurst, Douglas J. and Serfling, Matthew, Employment Protection, Investment, and Firm Growth (October 1, 2018). Review of Financial Studies, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2705066 or http://dx.doi.org/10.2139/ssrn.2705066

John (Jianqiu) Bai

Northeastern University - D'Amore-McKim School of Business ( email )

Boston, MA 02115
United States

Douglas J. Fairhurst

Washington State University ( email )

Todd Hall
P.O. Box 644746
Pullman, WA WA 85721-0108
United States

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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