Employment Protection Legislation, Investment, Earnings Management, and Corporate Performance
59 Pages Posted: 29 Dec 2016 Last revised: 14 Oct 2018
Date Written: October 9, 2018
Firms respond to laws increasing employee protection by becoming more selective in their investment decisions, reducing both employment and capital expenditures. They use earnings management to meet earnings benchmarks less after adoptions of employment protection laws (EPL) while experiencing significantly higher returns on investments. Moreover, post-EPL reported earnings are more likely to meet or exceed analyst earnings expectations and firms experience superior post-EPL adoption abnormal stock returns, consistent with analysts and investors not expecting the superior operating performance associated with EPL.
Keywords: Employment protection, Capital Expenditures, Operating performance, Earnings management
JEL Classification: J31, K31, M41
Suggested Citation: Suggested Citation