The Impact of Labor Protection Laws on the Relation between Leverage and Wage

Using U.S. state-level labor protection law as an exogenous shock, we find that the adoption ofthe law alleviates the wages pressure on highly leveraged firms, primarily due to employees’improved job security offered by the law. Particularly, our finding is more pronounced forfinancially constrained/distressed firms, and for firms whose employees have strong bargainingpower or face high unemployment risk. Overall, our work offers a new perspective towardsunderstanding the relation between leverage and wages, showing a positive side of the laborprotection law in lowering labor costs for highly leveraged firms