Employee Protection Shocks and Corporate Cash Holdings
60 Pages Posted: 3 Mar 2018
Date Written: February 22, 2018
We examine the relation between employee protection legislation and corporate cash holdings. As wages become less elastic in a firm’s production function, precautionary savings are expected to increase. 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 8.7%. Cash holdings increase more for financially unconstrained firms, labor-intensive firms and firms operating in volatile industries. Consistent with the financial flexibility argument of tighter employment protection increasing corporate cash needs, one additional dollar of cash is valued 30% higher post passage of pro-labor regulations compared to before the adoption.
Keywords: Cash holdings, Employee Protection, Firing Costs, Financial Constraints; Value of Cash
JEL Classification: G3, G32
Suggested Citation: Suggested Citation