Labor protection and dynamic leverage adjustments in the OECD countries

We study the link between employment protection laws (EPLs) and the speed of corporate leverage adjustments, emphasizing the role of the country's legal enforcement. Using comprehensive data from 19 OECD founding countries/members, we explore that firms operating in more stringent EPLs adjust s...

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Bibliographic Details
Published inInternational review of economics & finance Vol. 83; pp. 502 - 527
Main Authors Bai, Min, Ho, Ly, Lu, Yue, Qin, Yafeng
Format Journal Article
LanguageEnglish
Published Elsevier Inc 01.01.2023
Subjects
Dynamic trade-off theory
Employment protection laws
Legal enforcement
Leverage adjustment
OECD
OECD
O16
Legal enforcement
K31
G3
Employment protection laws
Dynamic trade-off theory
Leverage adjustment
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Summary:We study the link between employment protection laws (EPLs) and the speed of corporate leverage adjustments, emphasizing the role of the country's legal enforcement. Using comprehensive data from 19 OECD founding countries/members, we explore that firms operating in more stringent EPLs adjust slower to their target leverage ratios. These relationships are significant and robust for several tests addressing the endogeneity concern of a battery of robustness checks including an alternative measure of EPLs, an alternative measure of leverage, and alternative subsamples. We further demonstrate that the negative association between the stringency of EPLs and leverage SOA is more pronounced in countries with effective legal enforcement. Overall, our results are consistent with the dynamic trade-off theory of capital structure.
ISSN:1059-0560
1873-8036
DOI:10.1016/j.iref.2022.10.004