Wrongful Discharge Laws and Trade Receivables

Abstract

We use the staggered adoption of U.S. state-level Wrongful Discharge Laws as a quasi-natural experiment to examine how employment protection affects corporate trade credit decisions. We find that suppliers’ provision of trade credit decreases significantly with better labor protection. The trade credit reduction is more pronounced for firms with higher distress risk, financial constraints, and operating leverage. Firms operating in states with lower unionization and in industries with higher labor turnover and greater product market competition cut their trade credit more. Overall, our results suggest that increased labor costs following greater employment protection manifest as financial frictions that limit trade credit financing.

Keywords: Employment protection, Trade credit, Labor adjustment cost, Accounts receivables

JEL Classification: G30, G32, G38, J63, K31