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Labor unemployment insurance and firm cash holdings

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  • Devos, Erik
  • Rahman, Shofiqur

Abstract

This paper presents evidence that firms conserve cash to manage employees' perceptions of the risk of becoming unemployed. Employing a matched sample design and using state level changes in unemployment insurance (UI) benefits to proxy for unemployment risk, we test the hypothesis that cash holdings and unemployment risk are positively related. We find an economically and statistically significant decrease in cash holdings after an increase in UI benefits (i.e., lower unemployment risk). Robust to alternative specifications, our findings also suggest that the positive relation between cash holdings and unemployment risk is more pronounced for firms that are more labor intensive, have a high layoff propensity, have a higher fraction of low-wage workers, and are in industries with a higher fraction of UI recipients. Overall, our results are consistent with the idea that cash holdings are affected by not only shareholders but also other stakeholders: namely employees.

Suggested Citation

  • Devos, Erik & Rahman, Shofiqur, 2018. "Labor unemployment insurance and firm cash holdings," Journal of Corporate Finance, Elsevier, vol. 49(C), pages 15-31.
    • Handle: RePEc:eee:corfin:v:49:y:2018:i:c:p:15-31
    DOI: 10.1016/j.jcorpfin.2017.12.019
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • J01 - Labor and Demographic Economics - - General - - - Labor Economics: General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • M54 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Labor Management

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