Labor Protection and the Dynamics of Corporate Cash Holdings

46 Pages Posted: 14 Jun 2022 Last revised: 23 Oct 2022

See all articles by Panagiotis Asimakopoulos

Panagiotis Asimakopoulos

Loughborough University - School of Business and Economics; University of Piraeus

Rongbing Xiao

Sun Yat-sen University (SYSU)

Fangming Xu

University of Bristol

Huainan Zhao

Loughborough University - School of Business and Economics

Date Written: June 7, 2022

Abstract

Using a sample of 87,288 firm-year observations between 1969 and 2003, we find that the speed of adjustment of a firm’s cash holdings toward its optimal level is significantly reduced following the staggered adoption of state-level labor protection laws. This effect is more pronounced for firms subjected to financial constraints or financial distress. We further find that being far away from the optimal cash holdings hurts corporate profitability, and tougher labor protection deteriorates this real effect. Our results are robust to a series of tests, e.g., using GMM, instruments, PSM, or alternative samples. Overall, our study shows that stringent labor protection increases cash adjustment costs and, hence, affects the dynamics of corporate cash holdings.

Keywords: labor protection, speed of adjustment, corporate cash holdings, adjustment costs, good faith exception, trade-off theory

JEL Classification: G32, J63, K31

Suggested Citation

Asimakopoulos, Panagiotis and Xiao, Rongbing and Xu, Fangming and Zhao, Huainan, Labor Protection and the Dynamics of Corporate Cash Holdings (June 7, 2022). Available at SSRN: https://ssrn.com/abstract=4130467 or http://dx.doi.org/10.2139/ssrn.4130467

Panagiotis Asimakopoulos

Loughborough University - School of Business and Economics ( email )

Epinal Way
Leics LE11 3TU
Leicestershire
United Kingdom

University of Piraeus ( email )

80 Karaoli & Dimitriou Str.
18534 Piraeus, 185 34 -GR
Greece

Rongbing Xiao (Contact Author)

Sun Yat-sen University (SYSU) ( email )

135, Xingang Xi Road
Guangzhou, Guangdong 510275
China

Fangming Xu

University of Bristol ( email )

School of Accounting and Finance
15-19 Tyndalls Park Road
Bristol, BS8 1PQ
United Kingdom
+44(0)1173941503 (Phone)

HOME PAGE: http://https://research-information.bris.ac.uk/en/persons/fangming-xu

Huainan Zhao

Loughborough University - School of Business and Economics ( email )

Epinal Way
Leics LE11 3TU
Leicestershire
United Kingdom

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