Risk Sharing Within and Outside the Firm: The Disparate Effects of Wrongful Discharge Laws on Expected Stock Returns

Robert Mahlstedt () and Rüdiger Weber ()
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Robert Mahlstedt: University of Copenhagen
Rüdiger Weber: WU Vienna University of Economics and Business

No 13941, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: We study the effect of wrongful-discharge laws (WDL) on firm-level stock returns. We find disparate effects depending on the exact design of the law. Consistent with rational, risk-based pricing, the effect on returns seems to be linked to how firms share systematic risk with their employees under the respective laws. Firms in states with WDLs prohibiting employers from acting in bad faith have more intra-firm risk sharing and lower expected returns. Vaguer legislation that prohibits discharges in retaliation for acting in accordance with public policy is associated with less intra-firm risk sharing and higher expected returns.

Keywords: labor protection; expected stock returns; risk sharing (search for similar items in EconPapers)
JEL-codes: G12 G38 J38 (search for similar items in EconPapers)
Pages: 61 pages
Date: 2020-12
New Economics Papers: this item is included in nep-law, nep-lma and nep-rmg
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Citations: View citations in EconPapers (1)

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