Improving Bargaining Power or Putting Safety First? Ownership Structure and the Effect of Labor Market Regulation on Leverage
68 Pages Posted: 5 Jun 2018 Last revised: 13 Sep 2023
Date Written: September 1, 2023
Exploiting intertemporal variation in employment regulation, we study the role of ownership structure in the relationship between labor market rigidity and firm financial leverage. Arguing that employment protection increases operating leverage and that the corresponding risk considerations are particularly important for undiversified shareholders, we hypothesize that firms with concentrated ownership react with relatively more conservative capital structure choices. Examining listed firms in 28 OECD countries over a 20-year period provides supporting evidence. The effect, which does not appear to be due to pre-treatment differences, spurious correlation, or reverse causality, is more pronounced in the case of strategic blockholders and labor-intensive industries.
Keywords: Financial leverage, ownership structure, labor market regulation, labor power, financial flexibility
JEL Classification: G32, G33, J31, K31
Suggested Citation: Suggested Citation