Employee Protection Shocks and Corporate Cash Holdings

60 Pages Posted: 3 Mar 2018

See all articles by Christof Beuselinck

Christof Beuselinck

Catholic University of Lille - IESEG School of Management

Garen Markarian

HEC - University of Lausanne

Arnt Verriest

EDHEC Business School

Date Written: February 22, 2018

Abstract

We examine the relation between employee protection legislation and corporate cash holdings. As wages become less elastic in a firm’s production function, precautionary savings are expected to increase. We show that the staggered passage of legal exceptions to the “at-will” employment doctrine in various U.S. states led to an average increase in cash holdings by 8.7%. Cash holdings increase more for financially unconstrained firms, labor-intensive firms and firms operating in volatile industries. Consistent with the financial flexibility argument of tighter employment protection increasing corporate cash needs, one additional dollar of cash is valued 30% higher post passage of pro-labor regulations compared to before the adoption.

Keywords: Cash holdings, Employee Protection, Firing Costs, Financial Constraints; Value of Cash

JEL Classification: G3, G32

Suggested Citation

Beuselinck, Christof and Markarian, Garen and Verriest, Arnt, Employee Protection Shocks and Corporate Cash Holdings (February 22, 2018). Available at SSRN: https://ssrn.com/abstract=3128276 or http://dx.doi.org/10.2139/ssrn.3128276

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)

Garen Markarian

HEC - University of Lausanne ( email )

UNIL Dorigny
Lausanne, Lausanne 1015
Switzerland

Arnt Verriest

EDHEC Business School ( email )

Av Gustave Delory 24
Roubaix, DC 59057
France

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