Employment Protection, Investment, and Firm Growth

Abstract

We exploit the adoption of U.S. state-level labor protection laws to study the effect of employment protection on corporate investment rates and sales growth. We find that, following the adoption of these laws, capital expenditures as a percentage of book assets decrease, resulting in slower sales growth. Our findings are consistent with theories predicting that greater employment protection discourages investment by making projects more irreversible. Supporting this channel, following negative cash flow shocks, firms are less likely to downsize operations in states that have adopted these laws but more likely to downsize in states that have not adopted these laws. Authors have furnished code, data, and an Internet Appendix, which are available on the Oxford University Press Web site next to the link to the final published paper online.

Labor Laws and Corporate Investment

“…As the mean capital expenditures of the sample firms are 40.0% (Table ), that is an approximately 9.8% decline from the mean. For comparison, the adoption of employment protection laws that make dismissing employees costlier reduces capital expenditures of U.S. firms by 6.5% (Bai, Fairhurst, and Serfling ). Thus, the absence of RTW laws is associated with an economically and statistically significant decline in capital expenditures of unionized firms.…”

“…Thus, unionization, especially when unions are strong, can decrease capital expenditures of unionized firms. Examining the staggered adoptions of labor protection laws by U.S. states, Bai, Fairhurst, and Serfling () show that firms reduce their capital expenditures following the adoptions as these laws make it costlier to fire employees. Similarly, the differences in costs because of unionization and RTW laws may affect capital expenditures of firms.…”

Firm-Level Employment, Labour Market Reforms, and Bank Distress

“…Claessens and Ueda (2018) find that the staggered introduction of wrongfuldischarge laws in US states increased growth in knowledge intensive industries, especially in states with simultaneous bank branch deregulation. 9 In contrast, Bai et al (2019) and Lee and Shin (2018) find that wrongful-discharge laws in the US lead to lower firm-level investment, especially among financially constrained firms. Laeven et al (2018) compare the performance of firms subject to different employment protection rules during the financial crisis in Spain.…”

Political corruption and mergers and acquisitions

“…We construct the political connection variable as an indicator that equals 1 for politically connected firms and 0 otherwise. State political balance is proxied by the state-level fraction of the Democratic Party members in the House of Representatives in a given year (Serfling (2016); Bai, Fairhurst, and Serfling (2017)).…”

“…We then match the judicial districts' corruption data with the Compustat data and the M&A subsample based on firm headquarters location. We use the headquarters location as the identifier since it is where the majority of plants and operations of a firm is presumably based (Bai, Fairhurst, and Serfling (2017)). 2 Using a sample that includes 77,338 firm-year observations of 8,314 unique firms spanning from 1986 to 2014, we find that the levels of local corruption are positively related to firm acquisitiveness but negatively related to firm targetiveness.…”