Labor Protection and Corporate Misconduct: Evidence from International Equity Markets
Posted: 17 Feb 2021
Date Written: December 1, 2020
We utilize the exogenous intertemporal variation in employment protection across countries and study the impact of employment protection on international equity markets. We find robust evidence that firms located in countries with weak labor protection regulation exhibit a low level of one-year-ahead stock price crash risk relative to those in countries with strong labor protection regulation. It is consistent with the view that, when employees face material unemployment risk, they are more incentivized to engage in information search and analysis, thereby curtailing the effectiveness of managerial bad-news-hoarding activities (i.e., the protection heightening risk hypothesis). Our finding is robust to a battery of sensitivity tests. Further evidence shows that the impact of employment protection on crash risk is more pronounced for firms with a higher proclivity to suppress bad news and for firms in countries with stronger legal enforcement. Our findings have important implications for policymakers concerning equity extreme risk and labor protection around the globe.
Keywords: labor protection, crash risk, cross-country evidence
JEL Classification: J01, K31, G12
Suggested Citation: Suggested Citation