Firing Costs and the Stock Market
41 Pages Posted: 20 Feb 2021 Last revised: 23 Dec 2023
Date Written: December 8, 2020
We study the effects of firms' firing costs induced by the introduction of Wrongful Discharge Laws (WDLs) on stock market measures of risk and return. We find disparate effects for the different types of WDLs depending on how the law affects the flexibility of employment and wages. WDLs that result in more stable employment and more risk bearing by capital markets increase mean returns, Sharpe ratios, return volatility and factor betas. We find opposite effects for WDLs that address agency frictions, and, by fostering wage flexibility, alter the risk allocation in a way that is viewed more favorably by shareholders.
Keywords: Firing costs, expected stock returns, labor market frictions, risk sharing
JEL Classification: J38, G12, J33, G38
Suggested Citation: Suggested Citation