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Employment Protection and Venture Capital Investment: The Impact of Wrongful Discharge Laws

Author

Listed:
  • Wei Wang

    (Monte Ahuja College of Business, Cleveland State University, Cleveland, Ohio 44114)

  • Chris Yung

    (McIntire School of Commerce, University of Virginia, Charlottesville, Virginia 22904)

Abstract

Wrongful discharge laws (WDLs) provide limits to the employment-at-will doctrine, and thus impair operating flexibility, increasing expected financial distress costs by making it costly to fire employees. This impairment is detrimental to start-ups, leading to a decline in venture capital (VC) investment. Using a difference-in-differences framework enabled by the staggered adoption of WDLs across the U.S. states, we show VC investment declines after a state adopts the good faith exception (the strongest form of WDL). This decline is most pronounced in sectors with high labor dependency.

Suggested Citation

  • Wei Wang & Chris Yung, 2025. "Employment Protection and Venture Capital Investment: The Impact of Wrongful Discharge Laws," Management Science, INFORMS, vol. 71(2), pages 1523-1545, February.
    • Handle: RePEc:inm:ormnsc:v:71:y:2025:i:2:p:1523-1545
    DOI: 10.1287/mnsc.2023.01936
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