Risk Sharing Within and Outside the Firm: The Disparate Effects of Wrongful Discharge Laws on Expected Stock Returns

IZA Discussion Paper No. 13941

Posted: 20 Feb 2021

See all articles by Robert Mahlstedt

Robert Mahlstedt

IZA

Rüdiger Weber

WU Vienna; Vienna Graduate School of Finance (VGSF)

Multiple version iconThere are 2 versions of this paper

Date Written: December 08, 2020

Abstract

We study the effect of wrongful-discharge laws (WDL) on firm-level stock returns. We find disparate effects depending on the exact design of the law. Consistent with rational, risk-based pricing, the effect on returns seems to be linked to how firms share systematic risk with their employees under the respective laws. Firms in states with WDLs prohibiting employers from acting in bad faith have more intra-firm risk sharing and lower expected returns. Vaguer legislation that prohibits discharges in retaliation for acting in accordance with public policy is associated with less intra-firm risk sharing and higher expected returns.

Keywords: labor protection, expected stock returns, risk sharing

JEL Classification: G12, J38, G38

Suggested Citation

Mahlstedt, Robert and Weber, Rüdiger, Risk Sharing Within and Outside the Firm: The Disparate Effects of Wrongful Discharge Laws on Expected Stock Returns (December 08, 2020). IZA Discussion Paper No. 13941, Available at SSRN: https://ssrn.com/abstract=3746874

Rüdiger Weber (Contact Author)

WU Vienna ( email )

Welthandelsplatz 1 1
Wien, 1020
Austria

Vienna Graduate School of Finance (VGSF) ( email )

Welthandelsplatz 1
Vienna, 1020
Austria

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