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Firing Costs and Capital Structure Decisions
Author(s) -
SERFLING MATTHEW
Publication year - 2016
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/jofi.12403
Subject(s) - leverage (statistics) , financial distress , operating leverage , exploit , capital structure , earnings , debt , crowding out , monetary economics , business , labour economics , cost of capital , capital (architecture) , economics , affect (linguistics) , finance , microeconomics , financial system , profit (economics) , archaeology , linguistics , philosophy , computer security , machine learning , profitability index , computer science , history
I exploit the adoption of state‐level labor protection laws as an exogenous increase in employee firing costs to examine how the costs associated with discharging workers affect capital structure decisions. I find that firms reduce debt ratios following the adoption of these laws, with this result stronger for firms that experience larger increases in firing costs. I also document that, following the adoption of these laws, a firm's degree of operating leverage rises, earnings variability increases, and employment becomes more rigid. Overall, these results are consistent with higher firing costs crowding out financial leverage via increasing financial distress costs.