Employee Protection Shocks and Corporate Cash Holdings

60 Pages Posted: 3 Mar 2018 Last revised: 13 Jul 2021

See all articles by Christof Beuselinck

Christof Beuselinck

Catholic University of Lille - IESEG School of Management

Garen Markarian

HEC - University of Lausanne

Arnt Verriest

KU Leuven

Date Written: July 1, 2020

Abstract

We examine the relation between employee protection legislation and corporate cash holdings. Our rationale rests on the notion that higher labor adjustment costs increase a firm’s operating leverage making firms to adjust their liquidity management by increasing precautionary savings. Consistent with this, 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 7.2%. Cash increases are higher when unionization rates and industry concentration are lower, and when industry discharge rates and volatility is higher. Consistent with the financial flexibility argument of tighter employment protection increasing corporate cash needs, the value of cash increases after the passage of pro-labor regulations. Moreover, we find that the increase in the value of cash is especially pronounced for financially constrained firms.

Keywords: Cash holdings, Employee Protection, Firing Costs, Value of Cash

JEL Classification: G3, G32

Suggested Citation

Beuselinck, Christof and Markarian, Garen and Verriest, Arnt, Employee Protection Shocks and Corporate Cash Holdings (July 1, 2020). 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

KU Leuven ( email )

Oude Markt 13
Leuven, Vlaams-Brabant 3000
Belgium

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