Endogenous Operating Leverage: Foreign Labor Regulations and Firm Boundaries

65 Pages Posted: 14 Jul 2020 Last revised: 30 Nov 2020

See all articles by S. Katie Moon

S. Katie Moon

University of Colorado at Boulder - Leeds School of Business

Giorgo Sertsios

Universidad de los Andes, Chile

Date Written: November 30, 2020

Abstract

How do firms manage their operational leverage? We study this question in the context of U.S. multinationals facing changes in foreign labor regulations. We find that firms facing higher labor protection in foreign countries replace their integrated operations with arm's-length relations in those nations. This is consistent with the idea that when firms find it harder to terminate their workers in integrated operations, they change to an operating model where it is easier to replace or discontinue business partners instead of employees. Our findings show that firms offset the inflexibility from rigid labor markets by restructuring their real-side operations.

Keywords: Offshoring, Labor Rigidity, Operating Leverage, Financial Leverage

JEL Classification: G30, G32, J38, J80, K31

Suggested Citation

Moon, Katie and Sertsios, Giorgo, Endogenous Operating Leverage: Foreign Labor Regulations and Firm Boundaries (November 30, 2020). Available at SSRN: https://ssrn.com/abstract=3631536 or http://dx.doi.org/10.2139/ssrn.3631536

Katie Moon (Contact Author)

University of Colorado at Boulder - Leeds School of Business ( email )

Boulder, CO 80309-0419
United States

Giorgo Sertsios

Universidad de los Andes, Chile ( email )

Mons. Álvaro del Portillo
Las Condes
Santiago, 12.455
Chile

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