Improving Bargaining Power or Putting Safety First? Ownership Structure and the Effect of Labor Market Regulation on Leverage

57 Pages Posted: 19 Feb 2019

See all articles by Marina Kononova

Marina Kononova

University of Marburg - School of Business & Economics

Marc Steffen Rapp

University of Marburg - School of Business & Economics; University of Marburg - Marburg Centre for Institutional Economics (MACIE)

Iuliia Udoieva

University of Marburg - School of Business & Economics

Multiple version iconThere are 2 versions of this paper

Date Written: February 17, 2019

Abstract

While previous work suggests two competing explanations for the effect of labor market regulation on firms’ demand for debt, our results reconcile both the “strategic use of debt” and “financial flexibility” view. Exploiting staggered changes to labor laws in 28 OECD countries, we find that the average causal effect of employment protection on firm financial leverage is close to zero but hides much heterogeneity depending on firm ownership structure. We posit that a regulatory-induced increase in labor power (i) gives a firm a strategic incentive to raise more debt, but also (ii) increases operating leverage and the risk of financial distress that could encourage firms with poorly diversified blockholders to react with a more conservative financial policy compared to widely-held firms. Examining non-financial, non-utility listed firms over a 20-year period, we find that higher ownership concentration mitigates the positive effect of labor power on financial leverage, making the relationship less positive or more negative. This result does not seem to be driven by pretreatment differences among firms and is robust against a wide variety of tests. Our results highlight the importance of considering ownership structure in studying firms’ capital structure decisions.

Keywords: financial leverage, ownership structure, labor market regulation, labor power, financial flexibility

JEL Classification: G32, G33, J31, K31

Suggested Citation

Kononova, Marina and Rapp, Marc Steffen and Udoieva, Iuliia, Improving Bargaining Power or Putting Safety First? Ownership Structure and the Effect of Labor Market Regulation on Leverage (February 17, 2019). Available at SSRN: https://ssrn.com/abstract=3336288 or http://dx.doi.org/10.2139/ssrn.3336288

Marina Kononova

University of Marburg - School of Business & Economics ( email )

Universitätsstrasse 24
D-35032 Marburg, D-35032
Germany

Marc Steffen Rapp (Contact Author)

University of Marburg - School of Business & Economics ( email )

Am Plan 2
Marburg, D-35037
Germany

University of Marburg - Marburg Centre for Institutional Economics (MACIE) ( email )

Am Plan
Marburg, 35032
Germany

Iuliia Udoieva

University of Marburg - School of Business & Economics ( email )

Am Plan 2
Marburg, D-35037
Germany

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