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Risk Sharing Within and Outside the Firm: The Disparate Effects of Wrongful Discharge Laws on Expected Stock Returns

Author

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  • Mahlstedt, Robert

    (University of Copenhagen)

  • Weber, Rüdiger

    (WU Vienna University of Economics and Business)

Abstract

We study the effect of wrongful-discharge laws (WDL) on firm-level stock returns. We find disparate effects depending on the exact design of the law. Consistent with rational, risk-based pricing, the effect on returns seems to be linked to how firms share systematic risk with their employees under the respective laws. Firms in states with WDLs prohibiting employers from acting in bad faith have more intra-firm risk sharing and lower expected returns. Vaguer legislation that prohibits discharges in retaliation for acting in accordance with public policy is associated with less intra-firm risk sharing and higher expected returns.

Suggested Citation

  • Mahlstedt, Robert & Weber, Rüdiger, 2020. "Risk Sharing Within and Outside the Firm: The Disparate Effects of Wrongful Discharge Laws on Expected Stock Returns," IZA Discussion Papers 13941, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp13941
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    More about this item

    Keywords

    labor protection; expected stock returns; risk sharing;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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