We show that wrongful discharge laws -laws that protect employees against unjust dismissal -spur innovation and new firm creation. Wrongful discharge laws, particularly those that prohibit employers from acting in bad faith ex post, limit employers' ability to hold up innovating employees after the innovation is successful. By reducing the possibility of hold-up, these laws enhance employees' innovative efforts and encourage firms to invest in risky, but potentially mould-breaking, projects. We develop a model and provide supporting empirical evidence of this effect using the staggered adoption of wrongful discharge laws across the U.S. states.
Rating agencies have become more conservative in assigning corporate credit ratings over the period 1985 to 2009; holding firm characteristics constant, average ratings have dropped by three notches. This change does not appear to be fully warranted because defaults have declined over this period. Firms affected more by conservatism issue less debt, have lower leverage, hold more cash, are less likely to obtain a debt rating, and experience lower growth. Their debt spreads are lower than those of unaffected firms with the same rating, which implies that the market partly undoes the impact of conservatism on debt prices. This evidence suggests that firms and capital markets do not perceive the increase in conservatism to be fully warranted.
We show that wrongful discharge laws -laws that protect employees against unjust dismissal -spur innovation and new firm creation. Wrongful discharge laws, particularly those that prohibit employers from acting in bad faith ex post, limit employers' ability to hold up innovating employees after the innovation is successful. By reducing the possibility of hold-up, these laws enhance employees' innovative efforts and encourage firms to invest in risky, but potentially mould-breaking, projects. We develop a model and provide supporting empirical evidence of this effect using the staggered adoption of wrongful discharge laws across the U.S. states.
1 We are grateful to Hanh Le for excellent research assistance.
Abstract Labor Laws and InnovationCan stringent labor laws be e¢ cient? Possibly, if they provide …rms with a commitment device to not punish employees' short-run failures and thereby spur the pursuit of valuemaximizing innovative activities. In this paper, we provide empirical evidence that strong labor laws indeed appear to have an ex ante positive incentive e¤ect by encouraging the innovative pursuits of …rms and their employees. Using patents and citations as proxies for innovation and a time-varying index of labor laws, we …nd that innovation is fostered by stringent labor laws, especially by laws governing dismissal of employees. We provide this evidence using levels-on-levels, changes-on-changes, and …nally di¤erence-in-di¤erence regressions that exploit staggered country-level law changes. We also …nd that stringent labor laws disproportionately in ‡uence innovation in the more innovation-intensive sectors of the economy. Finally, we …nd that while the overall e¤ect of stringent labor laws is to dampen economic growth, laws that govern dismissal of employees are an exception: stringent laws governing dismissal promote economic growth, consistent with the evidence that they encourage …rm-level innovation.JEL: F30, G31, J5, J8, K31.
The importance of skilled labor and the inalienability of human capital expose firms to the risk of losing talent at critical times. Using Swedish microdata, we document that firms lose workers with the highest cognitive and noncognitive skills as they approach bankruptcy. In a quasi-experiment, we confirm that financial distress drives these results: following a negative export shock caused by exogenous currency movements, talent abandons the firm, but only if the exporter is highly leveraged. Consistent with talent dependence being associated with higher labor costs of financial distress, firms that rely more on talent have more conservative capital structures."For embattled employees of RadioShack, Wet Seal and other companies facing bankruptcy, the time to find a new job is long before the company goes under. […] 'The best time to find a job, is when you have a job,' says Ramin P. Baghai is with the Stockholm School of Economics. Rui C. Silva is with the Nova School of Business and Economics. Viktor Thell is with Finansinspektionen (Sweden's financial supervisory authority). Vikrant Vig is with the London Business School and the Kellogg School of Management at Northwestern University. We thank the Editor (Stefan Nagel), two anonymous referees
The importance of skilled labor and the inalienability of human capital expose firms to the risk of losing talent at critical times. Using Swedish microdata, we document that firms lose workers with the highest cognitive and noncognitive skills as they approach bankruptcy. In a quasi‐experiment, we confirm that financial distress drives these results: following a negative export shock caused by exogenous currency movements, talent abandons the firm, but only if the exporter is highly leveraged. Consistent with talent dependence being associated with higher labor costs of financial distress, firms that rely more on talent have more conservative capital structures.
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