Labor protection laws and bank loan contracting

Research output: Journal Publications and ReviewsRGC 21 - Publication in refereed journalpeer-review

25 Scopus Citations
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Original languageEnglish
Pages (from-to)37-74
Journal / PublicationJournal of Law and Economics
Volume58
Issue number1
Publication statusPublished - 1 Feb 2015

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Abstract

This paper examines the impact of labor regulations that restrict firms’ flexibility to adjust labor resources on the cost of corporate bank loans. Using within-country variation in employment protection legislation across 25 countries, I find that increases in employment protection lead to higher loan spreads, tighter nonprice loan contract terms, and more diffuse loan ownership structure. The effects of labor regulations are greater in industries with a higher rate of labor turnover and among borrowers with a higher probability of default. These results suggest that rigidities imposed by labor regulations have a significant impact on firms’ cost of capital.

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