Employment Protection Legislation and Corporate Performance

53 Pages Posted: 29 Dec 2016 Last revised: 2 Jan 2020

See all articles by Henock Louis

Henock Louis

Pennsylvania State University - Smeal College of Business

Oktay Urcan

University of Illinois at Urbana-Champaign

Date Written: December 2, 2019

Abstract

Firms respond to laws increasing employee protection by reducing both employment and capital expenditures. They use earnings management to meet earnings benchmarks less while experiencing significantly higher returns on investments, suggesting that employee protection potentially constrains managers’ myopic opportunistic behaviors. Firms achieve the higher operating returns also through more selective investments, smaller firm size, higher pricing power, and higher consumer spending. Moreover, reported earnings are more likely to meet or exceed analyst earnings expectations and firms experience superior abnormal stock returns after increases in employment protection, consistent with analysts and investors not expecting the increase in operating performance. The effect of employee protection on operating performance vanishes at some point and actually reverses in the presence of strong union activities.

Keywords: Employment protection, Capital expenditures, Operating performance, Earnings management, Consumer spending

JEL Classification: J31, K31, M41

Suggested Citation

Louis, Henock and Urcan, Oktay, Employment Protection Legislation and Corporate Performance (December 2, 2019). Available at SSRN: https://ssrn.com/abstract=2891040 or http://dx.doi.org/10.2139/ssrn.2891040

Henock Louis

Pennsylvania State University - Smeal College of Business ( email )

University Park, PA 16802-3306
United States
814-865-4160 (Phone)
814-863-8393 (Fax)

Oktay Urcan (Contact Author)

University of Illinois at Urbana-Champaign ( email )

515 E. Gregory Drive
4009 BIF MC-520
Champaign, IL 61820
United States
217-265-0383 (Phone)
217-244-0902 (Fax)

HOME PAGE: http://business.illinois.edu/profile/oktay-urcan/

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