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Labor Adjustment Costs and Risk Management

Published online by Cambridge University Press:  14 September 2018

Yue Qiu
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Abstract

This paper studies the effects of labor adjustment costs on corporate risk management. Labor adjustment costs attenuate the correlation between the internal funds of a firm and its investment opportunity, and create more incentives for the firm to smooth internal funds. Using a state border discontinuity approach, I find that state-level labor protection laws significantly impact a firm’s use of foreign currency derivative contracts. I further find that a firm holds more cash when labor adjustment costs are larger, and such an effect concentrates on firms that do not engage in derivative hedging.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 54 , Issue 3 , June 2019 , pp. 1447 - 1468
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2018 

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Footnotes

1

For helpful comments and discussions, I thank Heitor Almeida (the referee), Frederico Belo, Murray Frank, Jarrad Harford (the editor), Katie Moon, Tracy Yue Wang, Andrew Winton, and seminar participants at the University of Minnesota, as well as conference participants at the 2017 Midwest Finance Association Meeting. I alone am responsible for any errors.

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