Labor unemployment insurance and firm cash holdings

Erik Devos and Shofiqur Rahman

Journal of Corporate Finance, 2018, vol. 49, issue C, 15-31

Abstract: This paper presents evidence that firms conserve cash to manage employees' perceptions of the risk of becoming unemployed. Employing a matched sample design and using state level changes in unemployment insurance (UI) benefits to proxy for unemployment risk, we test the hypothesis that cash holdings and unemployment risk are positively related. We find an economically and statistically significant decrease in cash holdings after an increase in UI benefits (i.e., lower unemployment risk). Robust to alternative specifications, our findings also suggest that the positive relation between cash holdings and unemployment risk is more pronounced for firms that are more labor intensive, have a high layoff propensity, have a higher fraction of low-wage workers, and are in industries with a higher fraction of UI recipients. Overall, our results are consistent with the idea that cash holdings are affected by not only shareholders but also other stakeholders: namely employees.

Keywords: Unemployment risk; Stakeholders; Unemployment insurance benefits; Cash holdings; Employee welfare (search for similar items in EconPapers)
JEL-codes: G32 J01 M54 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (22)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:49:y:2018:i:c:p:15-31

DOI: 10.1016/j.jcorpfin.2017.12.019

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