Labor Adjustment Costs and Risk Management

Posted: 21 Nov 2016 Last revised: 20 Jan 2018

Date Written: January 18, 2018

Abstract

This paper studies the effects of labor adjustment costs on corporate risk management. Labor adjustment costs attenuate the correlation between a firm's internal funds and its investment opportunity and create more incentives for the firm to smooth internal funds. Using a state border discontinuity approach, we find that state-level labor protection laws significantly impact a firm's use of foreign currency derivative contracts. We further find that a firm holds more cash when labor adjustment costs are larger and such an effect concentrates on firms that do not engage in derivative hedging.

Keywords: Labor adjustment costs; Wrongful Discharge Laws; Risk Management

JEL Classification: G30, G32, J38

Suggested Citation

Qiu, Yue, Labor Adjustment Costs and Risk Management (January 18, 2018). Available at SSRN: https://ssrn.com/abstract=2872545 or http://dx.doi.org/10.2139/ssrn.2872545

Yue Qiu (Contact Author)

Temple University ( email )

Philadelphia, PA 19122
United States

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