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Abstract We exploit the adoption of U.S. state-level labor protection laws to study the effect of employment protection on corporate investment rates and sales growth. We find that, following the adoption of these laws, capital expenditures as a percentage of book assets decrease, resulting in slower sales growth. Our findings are consistent with theories predicting that greater employment protection discourages investment by making projects more irreversible. Supporting this channel, following negative cash flow shocks, firms are less likely to downsize operations in states that have adopted these laws but more likely to downsize in states that have not adopted these laws. Authors have furnished code, data, and an Internet Appendix, which are available on the Oxford University Press Web site next to the link to the final published paper online.
Bai et al. (Thu,) studied this question.