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The effect of labour protection laws on the relationship between leverage and wages

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  • Karpuz, Ahmet
  • Luo, Di
  • Xiao, Rongbing
  • Zhao, Huainan

Abstract

Previous research has shown that leverage has a positive effect on wages. Using US state-level labour protection laws as an exogenous shock, we find that the adoption of the law alleviates the effect of leverage on wages. We show that the mitigating effect on the leverage-wage relationship is more pronounced for firms with strong employee bargaining power. Our study highlights the positive role played by labour protection laws in lowering firms’ labour costs and improving their financial flexibility, which complements the literature and advances our understanding of the broad implications of labour protection laws.

Suggested Citation

  • Karpuz, Ahmet & Luo, Di & Xiao, Rongbing & Zhao, Huainan, 2023. "The effect of labour protection laws on the relationship between leverage and wages," Journal of Banking & Finance, Elsevier, vol. 148(C).
    • Handle: RePEc:eee:jbfina:v:148:y:2023:i:c:s0378426622003028
    DOI: 10.1016/j.jbankfin.2022.106722
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    More about this item

    Keywords

    Labour protection law; Leverage; Employee pay; Employee bargaining power; Capital structure;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs
    • K31 - Law and Economics - - Other Substantive Areas of Law - - - Labor Law

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