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