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Employment protection and leverage adjustment speed: Evidence from China

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  • Li, Mingming
  • Chiang, Yao-Min
  • Liu, Haiming

Abstract

Stricter employment protection may affect capital structure adjustment speed in two ways. First, it may increase the cost of capital and decrease the leverage adjustment speed. Second, it increases financing needs and capital adjustment speed. Using China's 2008 Labor Contract Law as a natural experiment and the PSM-DID methodology, we find that the latter effect dominates the former. Specifically, stricter employment protection increases leverage adjustment speed, and this effect is more pronounced for non-state-owned firms and firms with larger leverage deviations. Furthermore, transmission channel tests show that employment protection increases firms’ substitution of labor with capital, driving up investment and financing needs. Finally, the increased leverage adjustment speed induced by enhanced employment protection is beneficial to firm performance.

Suggested Citation

  • Li, Mingming & Chiang, Yao-Min & Liu, Haiming, 2023. "Employment protection and leverage adjustment speed: Evidence from China," Research in International Business and Finance, Elsevier, vol. 64(C).
    • Handle: RePEc:eee:riibaf:v:64:y:2023:i:c:s027553192300020x
    DOI: 10.1016/j.ribaf.2023.101894
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    More about this item

    Keywords

    Employment protection; Leverage adjustment; Financing need hypothesis;
    All these keywords.

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • J20 - Labor and Demographic Economics - - Demand and Supply of Labor - - - General

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