Hostname: page-component-848d4c4894-xfwgj Total loading time: 0 Render date: 2024-07-03T20:25:57.562Z Has data issue: false hasContentIssue false

Labor Adjustment Costs and Risk Management

Published online by Cambridge University Press:  14 September 2018

Abstract

This paper studies the effects of labor adjustment costs on corporate risk management. Labor adjustment costs attenuate the correlation between the internal funds of a firm and its investment opportunity, and create more incentives for the firm to smooth internal funds. Using a state border discontinuity approach, I find that state-level labor protection laws significantly impact a firm’s use of foreign currency derivative contracts. I further find that a firm holds more cash when labor adjustment costs are larger, and such an effect concentrates on firms that do not engage in derivative hedging.

Type
Research Article
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2018 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

1

For helpful comments and discussions, I thank Heitor Almeida (the referee), Frederico Belo, Murray Frank, Jarrad Harford (the editor), Katie Moon, Tracy Yue Wang, Andrew Winton, and seminar participants at the University of Minnesota, as well as conference participants at the 2017 Midwest Finance Association Meeting. I alone am responsible for any errors.

References

Acharya, V. V.; Baghai, R. P.; and Subramanian, K. V.. “Wrongful Discharge Laws and Innovation.” Review of Financial Studies, 27 (2014), 301346.Google Scholar
Almeida, H.; Campello, M.; Cunha, I.; and Weisbach, M. S.. “Corporate Liquidity Management: A Conceptual Framework and Survey.” Annual Review of Financial Economics, 6 (2014), 135162.Google Scholar
Autor, D. H.Outsourcing at Will: The Contribution of Unjust Dismissal Doctrine to the Growth of Employment Outsourcing.” Journal of Labor Economics, 21 (2003), 142.Google Scholar
Autor, D. H.; Donohue, J. I.; and Schwab, S.. “Review Costs of Wrongful-Discharge Laws.” Review of Economics and Statistics, 88 (2003), 211231.Google Scholar
Autor, D. H.; Kerr, W. R.; and Kugler, A. D.. “Does Employment Protection Reduce Productivity? Evidence from U.S. States.” Economic Journal, 117 (2007), 189217.Google Scholar
Azar, J. A.; Kagy, J.-F.; and Schmalz, M. C.. “Can Changes in the Cost of Carry Explain the Dynamics of Corporate ‘Cash’ Holdings?Review of Financial Studies, 29 (2016), 21942240.Google Scholar
Bai, J.; Fairhurst, D.; and Serfling, M.. “Employment Protection, Investment, and Firm Growth.” Working Paper, Northeastern University, Washington State University, and University of Tennessee (2017).Google Scholar
Bates, T. W.; Kahle, K. M.; and Stulz, R. M.. “Why Do U.S. Firms Hold So Much More Cash than They Used To.” Journal of Finance, 64 (2009), 19852021.Google Scholar
Belo, F.; Lin, X.; and Bazdresch, S.. “Labor Hiring, Investment, and Stock Return Predictability in the Cross Section.” Journal of Political Economy, 122 (2014), 129177.Google Scholar
Boxfold, D.“Employment Practice Liability: Jury Award Trends and Statistics.” Horsham, PA: LRP Publications (2008).Google Scholar
Cameron, C.; Gelbach, J.; and Miller, D.. “Robust Inference with Multiway Clustering.” Journal of Business and Economic Statistics, 29 (2011), 238249.Google Scholar
Froot, K. A.; Scharfstein, D. S.; and Stein, J. C.. “Risk Management: Coordinating Corporate Investment and Financing Policies.” Journal of Finance, 48 (1993), 16291658.Google Scholar
Graham, J. R., and Rogers, D. A.. “Do Firms Hedge in Response to Tax Incentives?Journal of Finance, 57 (2002), 815839.Google Scholar
Harford, J.; Klasa, S.; and Maxwell, W. F.. “Refinancing Risk and Cash Holdings.” Journal of Finance, 69 (2014), 9751012.Google Scholar
Hoberg, G., and Moon, S. K.. “Offshore Activities and Financial vs Operational Hedging.” Journal of Financial Economics, 125 (2017), 217244.Google Scholar
Holmes, T. J.The Effect of State Policies on the Location of Manufacturing: Evidence from State Borders.” Journal of Political Economy, 106 (1998), 667705.Google Scholar
Jung, D. J.“Jury Verdicts in Wrongful Termination Cases.” Report, Public Law Research Institute, University of California Hastings (1997).Google Scholar
Klasa, S.; Maxwell, W. F.; and Ortiz-Molina, H.. “The Strategic Use of Corporate Cash Holdings in Collective Bargaining with Labor Unions.” Journal of Financial Economics, 92 (2009), 421442.Google Scholar
Nance, D. R.; Smith, C. W.; and Smithson, C. W.. “On the Determinants of Corporate Hedging.” Journal of Finance, 48 (1993), 267284.Google Scholar
Ochoa, M.“Volatility, Labor Heterogeneity and Asset Prices.” FEDS Working Paper No. 2013-71 (2013).Google Scholar
Opler, T.; Pinkowitz, L.; Stulz, R.; and Williamson, R.. “The Determinants and Implications of Corporate Cash Holdings.” Journal of Financial Economics, 52 (1999), 346.Google Scholar
Purnanandam, A.Financial Distress and Corporate Risk Management: Theory and Evidence.” Journal of Financial Economics, 87 (2008), 706739.Google Scholar
Rampini, A. A.; Sufi, A.; and Viswanathan, S.. “Dynamic Risk Management.” Journal of Financial Economics, 111 (2014), 271296.Google Scholar
Schmalz, M. C.“Unionization, Cash, and Leverage.” Ross School of Business Paper No. 1215 (2015).Google Scholar
Schoefer, B.“The Financial Channel of Wage Rigidity.” Working Paper, University of California at Berkeley (2016).Google Scholar
Serfling, M.Firing Costs and Capital Structure Decisions.” Journal of Finance, 71 (2016), 22392286.Google Scholar
Simintzi, E.; Vig, V.; and Volpin, P.. “Labor Protection and Leverage.” Review of Financial Studies, 28 (2014), 561591.Google Scholar