Is privatization in a country related to the stringency of its employment protection laws (EPL) – and, if so, how? We address this question using privatization deals in fourteen European countries over three decades and all the changes in EPL within a country. Using traditional...

Firms respond to laws increasing employee protection by reducing both employment and capital expenditures. They use earnings management to meet earnings benchmarks less while experiencing significantly higher returns on investments, suggesting that employee protection potentially constrains...