Employment Protection and Share Repurchases: Evidence from Wrongful Discharge Laws
65 Pages Posted: 1 Jun 2018 Last revised: 7 Apr 2019
Date Written: April 4, 2019
We use the staggered adoption of Wrongful Discharge Laws (WDLs) by U.S. state courts as a quasi-natural experiment to examine the causal relation between employee firing costs and corporate payout policy. We find that the greater employment protection imposed by WDLs leads to higher stock repurchases, and that this impact is concentrated among financially unconstrained and well governed firms. Our analysis indicates that since higher firing costs exacerbate the conflict of interest between shareholders and workers and potentially lead to rent extraction by the latter, firms increase share buybacks to reduce the risk of wealth transfer from shareholders to workers.
Keywords: Employment Protection, Share Repurchases, Corporate Payout, Labor Laws
JEL Classification: G35, G32, J63, K31
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