Employee protection shocks and corporate cash holdings |
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| Institution: | 1. University of Texas at El Paso, Economics and Finance Department, College of Business Administration, El Paso, TX 79968, USA;2. New Mexico State University, Department of Finance, College of Business, Las Cruces, NM 88003, USA;1. Anderson School of Management, University of New Mexico, Albuquerque, NM 87131, United States of America;2. Department of Finance, National Chengchi University, No.64, Sec.2, ZhiNan Rd., Wenshan District, Taipei City 11605, Taiwan;3. Department of Applied Economics and Management, National Ilan University, No.1, Sec. 1, Shennong Rd., Yilan City, Yilan County 260, Taiwan |
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| Abstract: | We examine the relation between employee protection legislation and corporate cash holdings. Our rationale rests on the notion that higher labor adjustment costs increase a firm's operating leverage making firms to adjust their liquidity management by increasing precautionary savings. Consistent with this, we show that the staggered passage of legal exceptions to the “at-will” employment doctrine in various U.S. states led to an average increase in cash holdings by 7.2%. Cash increases are higher when unionization rates and industry concentration are lower, and when industry discharge rates and volatility is higher. Consistent with the financial flexibility argument of tighter employment protection increasing corporate cash needs, the value of cash increases after the passage of pro-labor regulations. Moreover, we find that the increase in the value of cash is especially pronounced for financially constrained firms. |
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