Risk Sharing Within and Outside the Firm: The Disparate Effects of Employment Protection on Expected Stock Returns

Description

We study the interrelation between two types of risk sharing - within the firm and on capital markets - by analyzing the effect of wrongful-discharge laws (WDLs) on stock returns. Consistent with rational, risk-based pricing, the effect on returns is linked to how shareholders and workers share systematic risk via distinct channels of employment and wage flexibility. We find disparate effects depending on the degree to which the respective law alleviates agency frictions. In states where WDLs prohibit employers from holding up employees by firing them, workers accept more variable compensation such that they bear more firm risk and expected stock returns are lower. Legislation that raises firing costs without addressing agency frictions only makes employment more sticky such that workers bear less firm risk and expected returns are higher.

Period	1 Oct 2021 → 2 Oct 2021
Event title	DGF Annual Meeting
Event type	Unknown
Degree of Recognition	National