Labor Unemployment Insurance and Firm Cash Holdings

49 Pages Posted: 14 Dec 2017 Last revised: 8 Aug 2018

See all articles by Erik Devos

Erik Devos

University of Texas at El Paso - College of Business Administration - Department of Economics and Finance

Shofiqur Rahman

New Mexico State University

Date Written: November 1, 2017

Abstract

This paper presents evidence that firms conserve cash to manage employees’ perceptions of the risk of becoming unemployed. Employing a matched sample design and using state level changes in unemployment insurance (UI) benefits to proxy for unemployment risk, we test the hypothesis that cash holdings and unemployment risk are positively related. We find an economically and statistically significant association between decreases in cash holdings, following an increase in UI benefits (i.e., lower unemployment risk). Our findings are robust to alternative specifications and we find that the positive relation between cash holdings and unemployment risk is more pronounced for firms that are more labor intensive, have a high layoff propensity, have a higher fraction of low-wage workers, and are in industries with a higher fraction of UI recipients. Overall, our results are consistent with the idea that cash holdings are affected by not only shareholders but also other stakeholders: namely employees.

Keywords: G32, J01, M54

JEL Classification: Unemployment risk, Stakeholders, Unemployment insurance benefits, Cash holdings, Employee welfare

Suggested Citation

Devos, Erik and Rahman, Shofiqur, Labor Unemployment Insurance and Firm Cash Holdings (November 1, 2017). Journal of Corporate Finance, Vol. 49, 2018. Available at SSRN: https://ssrn.com/abstract=3086211

Erik Devos (Contact Author)

University of Texas at El Paso - College of Business Administration - Department of Economics and Finance ( email )

500 W. University Ave.
El Paso, TX 79968
United States
915 747 7770 (Phone)

HOME PAGE: http://utminers/utep.edu/hdevos

Shofiqur Rahman

New Mexico State University ( email )

College of Business
Las Cruces, NM 88003
United States

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