Labor protection and dynamic leverage adjustments in the OECD countries

Min Bai (), Ly Ho, Yue Lu and Yafeng Qin

International Review of Economics & Finance, 2023, vol. 83, issue C, 502-527

Abstract: We study the link between employment protection laws (EPLs) and the speed of corporate leverage adjustments, emphasizing the role of the country's legal enforcement. Using comprehensive data from 19 OECD founding countries/members, we explore that firms operating in more stringent EPLs adjust slower to their target leverage ratios. These relationships are significant and robust for several tests addressing the endogeneity concern of a battery of robustness checks including an alternative measure of EPLs, an alternative measure of leverage, and alternative subsamples. We further demonstrate that the negative association between the stringency of EPLs and leverage SOA is more pronounced in countries with effective legal enforcement. Overall, our results are consistent with the dynamic trade-off theory of capital structure.

Keywords: OECD; Employment protection laws; Legal enforcement; Leverage adjustment; Dynamic trade-off theory (search for similar items in EconPapers)
JEL-codes: G3 K31 O16 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:83:y:2023:i:c:p:502-527

DOI: 10.1016/j.iref.2022.10.004

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