How do anti-discrimination laws affect firm performance and financial policies? Evidence from the post-World War II period

50 Pages Posted: 13 Mar 2019 Last revised: 25 Feb 2021

See all articles by Daniel Greene

Daniel Greene

Clemson University

Jaideep Shenoy

University of Connecticut

Date Written: February 25, 2021

Abstract

We exploit the staggered passage of state-level fair-employment laws in the post-World War II period to examine how stronger worker protection against racial discrimination affects firm profitability and financing decisions. We find that firms experience a decline in operating profitability after the passage of anti-discrimination laws. We also document that the adoption of these laws leads to a reduction in debt ratios, which suggests that firms are able to partially offset the negative effects on operating profitability by adjusting their capital structure. Consistent with theoretical predictions, the above effects of anti-discrimination laws are more pronounced for firms in states and cities with a greater proportion of African Americans, firms with high labor intensity, firms in states experiencing high African American migration, and firms in concentrated industries. Some of our evidence suggests that anti-discrimination laws lead to a reduction in statistical discrimination or monopsony power rather than taste-based discrimination. Taken together, our results are supportive of theoretical models of discrimination and show that racial discrimination laws significantly affect firm operating performance and financial policies.

Keywords: Labor, Capital Structure, Leverage, Discrimination

JEL Classification: G32, J71

Suggested Citation

Greene, Daniel and Shenoy, Jaideep, How do anti-discrimination laws affect firm performance and financial policies? Evidence from the post-World War II period (February 25, 2021). University of Connecticut School of Business Research Paper No. 19-11, Forthcoming in Management Science, Available at SSRN: https://ssrn.com/abstract=3339449 or http://dx.doi.org/10.2139/ssrn.3339449

Daniel Greene (Contact Author)

Clemson University ( email )

101 Sikes Ave
Clemson, SC 29634
United States

Jaideep Shenoy

University of Connecticut ( email )

School of Business
2100 Hillside Road
Storrs, CT 06269
United States

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