Employment Protection and Payout Policy

44 Pages Posted: 12 Feb 2018 Last revised: 12 Mar 2018

See all articles by Muhammad Farooq Ahmad

Muhammad Farooq Ahmad

SKEMA Business School – Université Côte d'Azur

Christof Beuselinck

Catholic University of Lille - IESEG School of Management

Helen Bollaert

SKEMA Business School

Date Written: March 3, 2018

Abstract

This paper examines the relationship between employment protection legislation (EPL) and corporate payouts. Employees are corporate claimants who compete with shareholders to extract economic rents generated by the firm, so management is influenced by workforce power via the EPL framework in setting its corporate payout policy. For a large international sample of 21 OECD countries for the period 1985-2013, we find that a one standard deviation increase in labor protection leads to a 5.07% (12.17%) lower dividend (total) payout. Consistent with the flexibility hypothesis, we find that EPL has a greater impact on payout in firms that are more resource-constrained such as labor-intensive firms, firms that face financial constraints and firms with higher operating leverage. The effects of tightening and loosening EPL are not symmetrical. Firms increase dividend payouts after employment protection is softened but are reluctant to cut dividends when employment protection is tightened. Our results provide important insights in the dynamics between labor law regulations and corporate financing decisions.

Keywords: Labor protection, pro-labor laws, dividends, payout policy

JEL Classification: G35, G38

Suggested Citation

Ahmad, Muhammad Farooq and Beuselinck, Christof and Bollaert, Helen, Employment Protection and Payout Policy (March 3, 2018). Available at SSRN: https://ssrn.com/abstract=3119607 or http://dx.doi.org/10.2139/ssrn.3119607

Muhammad Farooq Ahmad

SKEMA Business School – Université Côte d'Azur ( email )

Campus de Lille, Avenue Willy Brandt,
Lille, 59777
France

HOME PAGE: http://sites.google.com/site/mfarooqahmad85

Christof Beuselinck (Contact Author)

Catholic University of Lille - IESEG School of Management ( email )

3 Rue de la Digue
Office: A321
Puteaux, 92800
France
+33320545892 (Phone)

Helen Bollaert

SKEMA Business School ( email )

Avenue Willy Brandt
Euralille, 59777
France

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