Employment Protection and Venture Capital Investment: The Impact of Wrongful Discharge Laws

Wei Wang () and Chris Yung ()
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Wei Wang: Monte Ahuja College of Business, Cleveland State University, Cleveland, Ohio 44114
Chris Yung: McIntire School of Commerce, University of Virginia, Charlottesville, Virginia 22904

Management Science, 2025, vol. 71, issue 2, 1523-1545

Abstract: Wrongful discharge laws (WDLs) provide limits to the employment-at-will doctrine, and thus impair operating flexibility, increasing expected financial distress costs by making it costly to fire employees. This impairment is detrimental to start-ups, leading to a decline in venture capital (VC) investment. Using a difference-in-differences framework enabled by the staggered adoption of WDLs across the U.S. states, we show VC investment declines after a state adopts the good faith exception (the strongest form of WDL). This decline is most pronounced in sectors with high labor dependency.

Keywords: wrongful discharge laws; venture capital; difference-in-differences (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:71:y:2025:i:2:p:1523-1545

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