Labor Laws and Bank Loans

In this proposed research project, I examine how differences in labor market regulation across 40 countries influence the price and nonprice terms of bank loans offered to firms. My paper contributes to a recent and growing literature on the role of firm-labor relations in shaping firms’ financing decisions. Specifically, Matsa (2010) and Bae, Kang and Wang (2010) show that labor union bargaining power and firms’ treatment of employees have an important effect on the firms’ use of debt financing. To date, however, there has not been a cross-country empirical study exploring the role of laws regulating the relation between employers and employees in determining corporate loan contract terms. This project intends to fill this gap. I plan to use cross-country data on different aspects of labor market regulation, such as employment protection laws, labor unionization rate, labor bargaining power, and other employee practices, along with several dimensions of bank loan contracts to analyze this issue.The advantage of using an international setting is that it allows me to exploit substantial cross-country differences in labor market regulation. My focus on bank loans is motivated by the fact that bank are the most important suppliers of capital to risky businesses in most countries. Therefore, banks should naturally be concerned about workers’ influence on key corporate decisions, such as necessary labor adjustments. I believe that the results of this project will advance our understanding of the costs of labor market regulation and therefore be useful for researchers, policy makers, investors, and managers.