Alternative Work Arrangements and Cost of Equity: Evidence from a Quasi-Natural Experiment

Abstract

We examine whether firms’ use of alternative work arrangements, particularly temporary agency workers, affects their cost of equity. Exploiting a major labor market deregulation in Japan that induced manufacturing firms to increase their employment of temporary agency workers, we show that the cost of equity decreased in manufacturing firms, relative to nonmanufacturing firms, after the deregulation. Further analysis using variations within manufacturing firms provides corroborating evidence. The rigidity in labor expenses and the cost of debt also decreased in manufacturing firms. Overall, alternative work arrangements increase the flexibility in labor costs, leading to lower operating leverage and cost of capital.

Keywords: Cost of equity, Alternative work arrangement, Operating leverage, Natural experiment

JEL Classification: G12, G32, J21, J82