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Employment Protection and Banking Power: Evidence from Adoption of Wrongful Discharge Laws

Desheng Yin () and Xinting Zhen ()
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Desheng Yin: School of Economics, East China Normal University, Shanghai 200062, China
Xinting Zhen: Department of Business Administration and Accounting, Saint Michael’s College, Colchester, VT 05439, USA

Sustainability, 2021, vol. 13, issue 4, 1-22

Abstract: Human capital and labor costs are crucial for the sustainable growth of organizations, and take a vital role in affecting bank efficiency and banking power. This research empirically investigates whether labor employment protection affects banking power. The analysis exploits the staggered adoption of Wrongful Discharge Laws (WDLs) as a quasi-exogenous shock to employment protection. A Difference-In-Difference research design is implemented to study the impacts of WDLs on banking power, and the main results show that there exists a decline of banking power for commercial banks headquartered in states that adopt employment protection. This study further tests the main mechanism through which WDLs affect banking power and finds that the impaired banking power is primarily due to cost inefficiency but not profit inefficiency. Moreover, the adoption of wrongful discharge laws increases commercial banks’ labor costs and induces bank risk-taking.

Keywords: banking power; bank efficiency; wrongful discharge laws (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2021
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