Employee Protection Shocks and Corporate Cash Holdings

Accounting and Management Control

Speaker : Arnt Verriest
EDHEC Business School

HEC Campus - Build.T - Room T004

Abstract:

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.