Employment protection and tax aggressiveness: Evidence from wrongful discharge laws

Fairhurst, Douglas (dj), Yanguang Liu and Xiaoran Ni

Journal of Banking & Finance, 2020, vol. 119, issue C

Abstract: We examine whether labor market frictions affect firms’ tax aggressiveness. Exploiting the adoption of U.S. state-level Wrongful Discharge Laws as a quasi-exogenous shock to a firm's firing costs, we document a decline in tax aggressiveness for firms located in states that increase employment protection. We further show that greater employment protection increases distress risk. The decline in tax aggressiveness is more pronounced for firms that are more vulnerable to financial distress and constrained from external financial markets. Our results imply that firms avoid risky tax positions in order to mitigate increased distress risk due to more rigid labor costs.

Keywords: Tax aggressiveness; Employment protection; Wrongful Discharge Laws; Firing costs; Distress risk (search for similar items in EconPapers)
JEL-codes: G31 G38 H26 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:119:y:2020:i:c:s0378426620301734

DOI: 10.1016/j.jbankfin.2020.105907

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