Employment Protection and Corporate Cash Holdings: Evidence from China's Labor Contract Law

45 Pages Posted: 3 Jan 2018 Last revised: 31 Jul 2018

See all articles by Chenyu Cui

Chenyu Cui

University of International Business and Economics (UIBE) - Business School

Kose John

New York University (NYU) - Department of Finance

Jiaren Pang

Tsinghua University - School of Economics & Management

Haibin Wu

City University of Hong Kong (CityUHK)

Date Written: December 9, 2017

Abstract

Employment protection increases labor adjustment costs and hence the expected costs of financial distress for labor-intensive firms. It follows that these firms are likely to increase their cash holdings to reduce the risk of financial distress when employment protection is strengthened. Consistent with this prediction, we find that labor-intensive firms in China significantly increase their cash holdings following the enactment of China’s Labor Contract Law; other contemporaneous shocks do not seem to drive the finding. We also find that two events prior to the enactment that increase the likelihood of enacting the law have a similar effect. Further analysis shows that the impact of the law is concentrated on areas with strict law enforcement, state-owned enterprises, and industries that employ large numbers of migrant workers.

Keywords: Cash holdings; employment protection; labor adjustment costs

JEL Classification: G32, G34, K31

Suggested Citation

Cui, Chenyu and John, Kose and Pang, Jiaren and Wu, Haibin, Employment Protection and Corporate Cash Holdings: Evidence from China's Labor Contract Law (December 9, 2017). Available at SSRN: https://ssrn.com/abstract=3093646 or http://dx.doi.org/10.2139/ssrn.3093646

Chenyu Cui

University of International Business and Economics (UIBE) - Business School ( email )

Beijing
China

Kose John

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0337 (Phone)
212-995-4233 (Fax)

Jiaren Pang (Contact Author)

Tsinghua University - School of Economics & Management ( email )

Beijing, 100084
China

Haibin Wu

City University of Hong Kong (CityUHK) ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

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