Labor Adjustment Costs and Risk Management
Posted: 21 Nov 2016 Last revised: 20 Jan 2018
Date Written: January 18, 2018
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: Suggested Citation