Labor Protection and Leverage

Abstract

This paper examines the effect of labor protection on firm financial structure. We exploit inter-temporal variations in employment protection laws across 21 OECD countries and find that labor friendly reforms are associated with a reduction in firm leverage. We also find that the negative effect of labor protection on leverage is more pronounced in firms that rely more on labor, are subject to more frequent hiring and firing, and have lower liquidation value. These results are consistent with the view that employment protection increases operating leverage and thus crowds out financial leverage. Furthermore, we find that increases in employment protection impact negatively firm investment and growth in sectors that are more dependent on external capital. These results indicate that firms' reduced ability to raise external capital, due to stronger labor protection, has negative real effects.

Labor Unions and Corporate Cash Holdings: Evidence From International Data

“…Second, our findings provide additional evidence that supports the argument by Opler et al () that cash is not negative debt, based on the trade‐off theory . Given the difference between our findings and those of Simintzi, Vig, and Volpin (), this reveals that cash is not simply regarded as negative debt from a bargaining perspective in an international setting. This is a channel that has not been identified in terms of the difference between cash and debt.…”

“…First, we provide evidence on the bargaining role of corporate cash holdings using international data. Simintzi, Vig, and Volpin () find a negative relation between leverage and employment protection in an international setting and argue that the results are not consistent with the prediction that leverage is used as a bargaining tool. Moreover, they find a negative relation between union density and leverage, and argue that this is not consistent with the theory of debt as a bargaining tool in an international setting (see Simintzi, Vig, and Volpin , p. 579).…”

“…Simintzi, Vig, and Volpin () find a negative relation between leverage and employment protection in an international setting and argue that the results are not consistent with the prediction that leverage is used as a bargaining tool. Moreover, they find a negative relation between union density and leverage, and argue that this is not consistent with the theory of debt as a bargaining tool in an international setting (see Simintzi, Vig, and Volpin , p. 579). Our article differs from Simintzi, Vig, and Volpin in that we find evidence supporting the bargaining role of corporate cash holdings in an international setting.…”

Employee rights and acquisitions

“…Myers and Saretto (2011) show that strikes are less likely at highly leveraged firms, so firms vulnerable to strikes increase leverage. Simintzi, Vig, and Volpin (2015) find in a cross-country setting that firms reduce leverage in response to increased employee power. Chen, Kacperczyk, and Ortiz-Molina (2012) find that firms with strong unions take less risk and face a lower cost of debt.…”

Labor Unions and Corporate Financial Leverage: The Bargaining Device versus Crowding-out Hypotheses

“…Moreover, unions also induce a degree of operating inflexibility in that they reduce the manager's discretion in hiring and firing decisions. This operating inflexibility is hypothesized to reduce financial leverage (see, e.g., (Kuzmina, 2013, Simintzi, Vig, andVolpin, 2015)). In combination, these forces deliver a crowding-out hypothesis predicting a substitution effect between financial leverage and unionization.…”