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Employment protection legislation, adjustment costs and cross-country differences in cost behavior

Author

Listed:
  • Banker, Rajiv D.
  • Byzalov, Dmitri
  • Chen, Lei (Tony)

Abstract

Central to the economic theory of sticky costs is the proposition that managers consider adjustment costs when changing resource levels. We test this proposition using employment protection legislation (EPL) provisions in different countries as a proxy for labor adjustment costs. Using a large sample of firms in 19 OECD countries during 1990–2008, we find that the degree of cost stickiness at the firm level varies with the strictness of the country-level EPL provisions. This finding supports the theory that cost stickiness reflects the deliberate resource commitment decisions of managers in the presence of adjustment costs.

Suggested Citation

  • Banker, Rajiv D. & Byzalov, Dmitri & Chen, Lei (Tony), 2013. "Employment protection legislation, adjustment costs and cross-country differences in cost behavior," Journal of Accounting and Economics, Elsevier, vol. 55(1), pages 111-127.
    • Handle: RePEc:eee:jaecon:v:55:y:2013:i:1:p:111-127
    DOI: 10.1016/j.jacceco.2012.08.003
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