Employment Protection Legislation and Corporate Performance
53 Pages Posted: 29 Dec 2016 Last revised: 2 Jan 2020
Date Written: December 2, 2019
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: Suggested Citation