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Employment Protection and Payout Policy

Author

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  • Muhammad Farooq Ahmad
  • Christof Beuselinck
  • Helen Bollaert

Abstract

This paper examines the relationship between employment protection legislation (EPL) and corporate payouts. Employees are corporate claimants who compete with shareholders to extract economic rents generated by the firm, so management is influenced by workforce power via the EPL framework in setting its corporate payout policy. For a large international sample of 21 OECD countries for the period 1985-2013, we find that a one standard deviation increase in labor protection leads to a 5.07% (12.17%) lower dividend (total) payout. Consistent with the flexibility hypothesis, we find that EPL has a greater impact on payout in firms that are more resource-constrained such as labor-intensive firms, firms that face financial constraints and firms with higher operating leverage. The effects of tightening and loosening EPL are not symmetrical. Firms increase dividend payouts after employment protection is softened but are reluctant to cut dividends when employment protection is tightened. Our results provide important insights in the dynamics between labor law regulations and corporate financing decisions.

Suggested Citation

  • Muhammad Farooq Ahmad & Christof Beuselinck & Helen Bollaert, 2017. "Employment Protection and Payout Policy," Finance, Presses universitaires de Grenoble, vol. 38(3), pages 5-43.
    • Handle: RePEc:cai:finpug:fina_383_0005
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    Citations

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    Cited by:

    1. Ahmad, Muhammad Farooq & Aziz, Saqib & Dowling, Michael & Kowalewski, Oskar, 2023. "Board reforms and innovation," International Review of Financial Analysis, Elsevier, vol. 88(C).
    2. Tran, Quoc Trung, 2023. "Employment protection and corporate risk-taking," Finance Research Letters, Elsevier, vol. 51(C).
    3. Dang, Viet A. & De Cesari, Amedeo & Phan, Hieu V., 2021. "Employment protection and share repurchases: Evidence from wrongful discharge laws," Journal of Corporate Finance, Elsevier, vol. 69(C).
    4. Karpuz, Ahmet & Kim, Kirak & Ozkan, Neslihan, 2020. "Employment protection laws and corporate cash holdings," Journal of Banking & Finance, Elsevier, vol. 111(C).
    5. Tran, Quoc Trung, 2023. "Employment protection legislation and R&D investment," Research in International Business and Finance, Elsevier, vol. 64(C).

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