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Firing Costs and Capital Structure Decisions

The Journal of finance (New York), 2016-10, Vol.71 (5), p.2239-2286 [Peer Reviewed Journal]

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Title:
Firing Costs and Capital Structure Decisions
Author: SERFLING, MATTHEW
Subjects: Adoption law ; Capital costs ; Capital structure ; Control variables ; Cost structure ; Earnings ; Employment ; Employment termination ; Financial leverage ; Firings ; Good faith ; Law firms ; Operating leverage ; Studies
Is Part Of: The Journal of finance (New York), 2016-10, Vol.71 (5), p.2239-2286
Description: I exploit the adoption of state-level labor protection laws as an exogenous increase in employee firing costs to examine how the costs associated with discharging workers affect capital structure decisions. I find that firms reduce debt ratios following the adoption of these laws, with this result stronger for firms that experience larger increases in firing costs. I also document that, following the adoption of these laws, a firm's degree of operating leverage rises, earnings variability increases, and employment becomes more rigid. Overall, these results are consistent with higher firing costs crowding out financial leverage via increasing financial distress costs.
Publisher: Cambridge: Blackwell Publishing Ltd
Language: English
Identifier: ISSN: 0022-1082
EISSN: 1540-6261
DOI: 10.1111/jofi.12403
CODEN: JLFIAN
Source: Alma/SFX Local Collection

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