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Employment protection and the cost of equity capital: Evidence from wrongful discharge laws

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  • Li, Tongxia
  • Lu, Chun
  • Si, Ieong Cheng
  • Zhao, Zucheng

Abstract

We exploit the adoption of Wrongful Discharge Laws across U.S. states as a quasi-natural experiment to study the effect of employment protection on the cost of equity capital. Using a sample of public U.S. firms between 1970 and 2000, we find that the greater employment protection induced by adopting the good faith exception raises the cost of equity. We further show that firms become riskier following the passage of this law. Overall, our findings suggest that employment protection impacts firms’ equity financing costs.

Suggested Citation

  • Li, Tongxia & Lu, Chun & Si, Ieong Cheng & Zhao, Zucheng, 2022. "Employment protection and the cost of equity capital: Evidence from wrongful discharge laws," Finance Research Letters, Elsevier, vol. 47(PB).
    • Handle: RePEc:eee:finlet:v:47:y:2022:i:pb:s1544612322000812
    DOI: 10.1016/j.frl.2022.102765
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    Cited by:

    1. Li, Tongxia & Ang, Tze Chuan ‘Chewie’ & Lu, Chun, 2023. "Employment protection and the provision of trade credit," Journal of Banking & Finance, Elsevier, vol. 155(C).

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    More about this item

    Keywords

    Cost of equity; Employment protection; Wrongful Discharge Laws; Financial distress risk; JEL Classification; G12; G30; G38; M41;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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