Alternative Work Arrangements and Cost of Equity: Evidence from a Quasi-Natural Experiment
75 Pages Posted: 8 Jan 2018 Last revised: 1 Mar 2019
Date Written: February 27, 2019
We examine whether firms’ increasing use of alternative work arrangements, particularly temporary agency workers, affects their cost of equity capital. Exploiting a major labor market deregulation in Japan that lifted a ban that had prohibited temporary agency workers from engaging in production line work, we show that cost of equity decreased in manufacturing firms, relative to non-manufacturing firms, after the deregulation. Further analysis using variations only within manufacturing firms provides corroborating evidence. Overall, our results are most consistent with the interpretation that alternative work arrangements increase flexibility in labor costs, leading to lower operating leverage and cost of equity.
Keywords: Cost of equity, Alternative work arrangement, Operating leverage, Natural experiment
JEL Classification: G12, G32, J21, J82
Suggested Citation: Suggested Citation