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Labor protection and dynamic leverage adjustments in the OECD countries

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  • Bai, Min
  • Ho, Ly
  • Lu, Yue
  • Qin, Yafeng

Abstract

We study the link between employment protection laws (EPLs) and the speed of corporate leverage adjustments, emphasizing the role of the country's legal enforcement. Using comprehensive data from 19 OECD founding countries/members, we explore that firms operating in more stringent EPLs adjust slower to their target leverage ratios. These relationships are significant and robust for several tests addressing the endogeneity concern of a battery of robustness checks including an alternative measure of EPLs, an alternative measure of leverage, and alternative subsamples. We further demonstrate that the negative association between the stringency of EPLs and leverage SOA is more pronounced in countries with effective legal enforcement. Overall, our results are consistent with the dynamic trade-off theory of capital structure.

Suggested Citation

  • 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.
    • Handle: RePEc:eee:reveco:v:83:y:2023:i:c:p:502-527
    DOI: 10.1016/j.iref.2022.10.004
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    More about this item

    Keywords

    OECD; Employment protection laws; Legal enforcement; Leverage adjustment; Dynamic trade-off theory;
    All these keywords.

    JEL classification:

    • G3 - Financial Economics - - Corporate Finance and Governance
    • K31 - Law and Economics - - Other Substantive Areas of Law - - - Labor Law
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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