Alternative Work Arrangements and Cost of Equity: Evidence from a Quasi-Natural Experiment
Journal of Financial and Quantitative Analysis, Forthcoming
Posted: 8 Jan 2018 Last revised: 25 Aug 2021
Date Written: October 26, 2019
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
Suggested Citation: Suggested Citation