The Effect of Labour Protection Laws on the Relationship between Leverage and Wages

54 Pages Posted: 12 Jul 2021 Last revised: 23 Nov 2022

See all articles by Ahmet Karpuz

Ahmet Karpuz

University of Leeds

Di Luo

University of Southampton - Southampton Business School

Rongbing Xiao

Sun Yat-sen University (SYSU)

Huainan Zhao

Loughborough University - School of Business and Economics

Date Written: July 9, 2021

Abstract

Previous research has shown that leverage has a positive effect on wages. Using US state-level labour protection laws as an exogenous shock, we find that the adoption of the law alleviates the effect of leverage on wages. We show that the mitigating effect on the leverage-wage relationship is more pronounced for firms with strong employee bargaining power. Our study highlights the positive role played by labour protection laws in lowering firms’ labour costs and improving their financial flexibility, which complements the literature and advances our understanding of the broad implications of labour protection laws.

Keywords: Labuor protection, leverage, employee pay, bargaining power, capital structure

JEL Classification: G32, J31, J63, K31

Suggested Citation

Karpuz, Ahmet and Luo, Di and Xiao, Rongbing and Zhao, Huainan, The Effect of Labour Protection Laws on the Relationship between Leverage and Wages (July 9, 2021). Journal of Banking and Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3883419 or http://dx.doi.org/10.2139/ssrn.3883419

Ahmet Karpuz

University of Leeds ( email )

Leeds LS2 9JT
United Kingdom

Di Luo

University of Southampton - Southampton Business School ( email )

University Rd.
Southampton SO17 1BJ, Hampshire SO17 1LP
United Kingdom

Rongbing Xiao (Contact Author)

Sun Yat-sen University (SYSU) ( email )

135, Xingang Xi Road
Guangzhou, Guangdong 510275
China

Huainan Zhao

Loughborough University - School of Business and Economics ( email )

Epinal Way
Leics LE11 3TU
Leicestershire
United Kingdom

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