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Employment protection and corporate cash holdings: Evidence from China's labor contract law

Author

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  • Cui, Chenyu
  • John, Kose
  • Pang, Jiaren
  • Wu, Haibin

Abstract

Employment protection increases labor adjustment costs and hence the expected costs of financial distress for labor-intensive firms. It follows that these firms are likely to increase their cash holdings to reduce the risk of financial distress when employment protection is strengthened. Consistent with this prediction, we find that labor-intensive firms in China significantly increase their cash holdings following the enactment of China's Labor Contract Law; other contemporaneous shocks do not seem to drive the finding. We also find that two events prior to the enactment that increase the likelihood of enacting the law have a similar effect. Further analysis shows that the impact of the law is concentrated on areas with strict law enforcement, state-owned enterprises, and industries that employ large numbers of migrant workers.

Suggested Citation

  • Cui, Chenyu & John, Kose & Pang, Jiaren & Wu, Haibin, 2018. "Employment protection and corporate cash holdings: Evidence from China's labor contract law," Journal of Banking & Finance, Elsevier, vol. 92(C), pages 182-194.
    • Handle: RePEc:eee:jbfina:v:92:y:2018:i:c:p:182-194
    DOI: 10.1016/j.jbankfin.2018.05.011
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    Citations

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    Cited by:

    1. Chen, Hanwen & Yang, Daoguang & Zhang, Joseph H. & Zhou, Haiyan, 2020. "Internal controls, risk management, and cash holdings," Journal of Corporate Finance, Elsevier, vol. 64(C).
    2. Karpuz, Ahmet & Kim, Kirak & Ozkan, Neslihan, 2020. "Employment protection laws and corporate cash holdings," Journal of Banking & Finance, Elsevier, vol. 111(C).
    3. Bai, Min & Ho, Ly & Lu, Yue & Qin, Yafeng, 2023. "Labor protection and dynamic leverage adjustments in the OECD countries," International Review of Economics & Finance, Elsevier, vol. 83(C), pages 502-527.
    4. Liu, Guanchun & Liu, Yuanyuan & Zhang, Chengsi & Zhu, Yueteng, 2021. "Social insurance law and corporate financing decisions in China," Journal of Economic Behavior & Organization, Elsevier, vol. 190(C), pages 816-837.
    5. Ahmad, Muhammad Farooq & Kowalewski, Oskar, 2021. "Collective bargaining power and corporate cash policy," International Review of Law and Economics, Elsevier, vol. 68(C).
    6. Lai, Shaojie & Li, Xiaorong & Liu, Shiang & Wang, Qing Sophie, 2022. "Institutional investors’ site visits and corporate employment decision-making," Journal of Contemporary Accounting and Economics, Elsevier, vol. 18(3).
    7. Suman Lodh & Monomita Nandy & Jaskaran Kaur, 2023. "Influence of governance bundles and directors' social capital on cash holding in foreign cross‐listed firms," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(4), pages 4271-4298, October.
    8. Geran Tian & Weixing Wu, 2022. "Employment protection, production flexibility and corporate capital spending," Australian Economic Papers, Wiley Blackwell, vol. 61(1), pages 1-23, March.
    9. Jian Ding & Yixiao Zhou, 2021. "Did the Labor Contract Law Affect the Capital Deepening and Efficiency of Chinese Private Firms?," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 29(5), pages 105-126, September.
    10. Liu, Guanchun & Liu, Yuanyuan & Ye, Yongwei & Zhang, Chengsi, 2021. "Collateral menus and corporate employment: Evidence from China's Property Law," Journal of Economic Behavior & Organization, Elsevier, vol. 189(C), pages 686-709.
    11. Li, Mingming & Chiang, Yao-Min & Liu, Haiming, 2023. "Employment protection and leverage adjustment speed: Evidence from China," Research in International Business and Finance, Elsevier, vol. 64(C).
    12. Liu, Heng & Luo, Jin-hui, 2022. "Legacy of ideology: The enduring effect of CEOs’ socialist ideological imprint on private firms’ employee-related CSR," Journal of Business Research, Elsevier, vol. 147(C), pages 491-504.
    13. Deng, Lixing & Lai, Shaojie & Liu, Shiang & Pu, Xiaoling, 2022. "Social insurance premiums and corporate cash holdings: Evidence from social insurance law in China," Economic Modelling, Elsevier, vol. 114(C).
    14. Dang, Viet A. & De Cesari, Amedeo & Phan, Hieu V., 2021. "Employment protection and share repurchases: Evidence from wrongful discharge laws," Journal of Corporate Finance, Elsevier, vol. 69(C).
    15. Xu, Xiaodong & Mu, Yayu & Wang, Juan, 2023. "Corporate risk and financial asset holdings," Pacific-Basin Finance Journal, Elsevier, vol. 81(C).
    16. Li, Guangzhong & Egger, Peter H. & Li, Jie & Wu, Han, 2022. "Exporting firms’ factor and product-quality adjustments in response to employment protection legislation: Evidence from China," China Economic Review, Elsevier, vol. 73(C).
    17. Wang, Li & Wu, Yiqi & Chen, Yaxin & Dai, Yunhao, 2023. "Distance produces the fear of loss: Customer geographic proximity and corporate cash holdings," International Review of Financial Analysis, Elsevier, vol. 87(C).
    18. Huang, Yuhong & Gao, Yajia, 2023. "Labor protection and the digital transformation of enterprises: Empirical evidence from China's social insurance law," Finance Research Letters, Elsevier, vol. 57(C).
    19. Jiang, Jiaoliang & Chen, Yulin, 2021. "How does labor protection influence corporate risk-taking? Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 68(C).
    20. Kang, Yankun & Liang, Shuyuan & Bai, Caiquan & Feng, Chen, 2020. "Labor contracts and parents’ educational expectations for children: Income effect or expected effect?," Children and Youth Services Review, Elsevier, vol. 118(C).
    21. Yao, Wenyun & Lu, Feier & Wang, Yuting & Song, Zilong, 2023. "Social insurance contributions and firms' debt concentration choice: A quasi-natural experiment based on the implementation of China's social insurance law," Pacific-Basin Finance Journal, Elsevier, vol. 79(C).
    22. Li, Xiao-Lin & Qiu, Guojing & Ding, Hui, 2022. "The impact of exchange rate policy uncertainty shock on Chinese energy firms' risk-taking," Energy Economics, Elsevier, vol. 105(C).
    23. Guo, Jing & Tang, Qi & Jin, Guangzhu, 2021. "Labor protection and the efficiency of human capital investment," Economic Analysis and Policy, Elsevier, vol. 69(C), pages 195-207.

    More about this item

    Keywords

    Cash holdings; Employment protection; Labor adjustment costs;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • K31 - Law and Economics - - Other Substantive Areas of Law - - - Labor Law

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