Employment protection and corporate cash holdings : Evidence from China's labor contract law

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review

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Original languageEnglish
Pages (from-to)182-194
Journal / PublicationJournal of Banking and Finance
Online published19 May 2018
Publication statusPublished - Jul 2018


Employment protection increases labor adjustment costs and hence the expected costs of financial distress for labor-intensive firms. It follows that these firms are likely to increase their cash holdings to reduce the risk of financial distress when employment protection is strengthened. Consistent with this prediction, we find that labor-intensive firms in China significantly increase their cash holdings following the enactment of China's Labor Contract Law; other contemporaneous shocks do not seem to drive the finding. We also find that two events prior to the enactment that increase the likelihood of enacting the law have a similar effect. Further analysis shows that the impact of the law is concentrated on areas with strict law enforcement, state-owned enterprises, and industries that employ large numbers of migrant workers.

Research Area(s)

  • Cash holdings, Employment protection, Labor adjustment costs