2018/09/14 by Yue Qiu
Business, Management and Accounting · #Risk Management in Financial Firms #Corporate Finance and Governance #Auditing, Earnings Management, Governance
paper · doi:10.1017/s0022109018000960
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.