Labor Adjustment Costs and Risk Management

Yue Qiu

Journal of Financial and Quantitative Analysis, 2019, vol. 54, issue 3, 1447-1468

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.

Date: 2019
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