Employment protection and the cost of equity capital: Evidence from wrongful discharge laws

Tongxia Li, Chun Lu, Ieong Cheng Si and Zucheng Zhao

Finance Research Letters, 2022, vol. 47, issue PB

Abstract: We exploit the adoption of Wrongful Discharge Laws across U.S. states as a quasi-natural experiment to study the effect of employment protection on the cost of equity capital. Using a sample of public U.S. firms between 1970 and 2000, we find that the greater employment protection induced by adopting the good faith exception raises the cost of equity. We further show that firms become riskier following the passage of this law. Overall, our findings suggest that employment protection impacts firms’ equity financing costs.

Keywords: Cost of equity; Employment protection; Wrongful Discharge Laws; Financial distress risk; JEL Classification; G12; G30; G38; M41 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:47:y:2022:i:pb:s1544612322000812

DOI: 10.1016/j.frl.2022.102765

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