Employment protection and tax aggressiveness: Evidence from wrongful discharge laws

Douglas (DJ) Fairhurst, Yanguang Liu, Xiaoran Ni

Research output: Contribution to journalArticlepeer-review

16 Scopus citations

Abstract

We examine whether labor market frictions affect firms’ tax aggressiveness. Exploiting the adoption of U.S. state-level Wrongful Discharge Laws as a quasi-exogenous shock to a firm's firing costs, we document a decline in tax aggressiveness for firms located in states that increase employment protection. We further show that greater employment protection increases distress risk. The decline in tax aggressiveness is more pronounced for firms that are more vulnerable to financial distress and constrained from external financial markets. Our results imply that firms avoid risky tax positions in order to mitigate increased distress risk due to more rigid labor costs.

Original languageEnglish (US)
Article number105907
JournalJournal of Banking and Finance
Volume119
DOIs
StatePublished - Oct 2020
Externally publishedYes

All Science Journal Classification (ASJC) codes

  • Finance
  • Economics and Econometrics

Keywords

  • Distress risk
  • Employment protection
  • Firing costs
  • Tax aggressiveness
  • Wrongful Discharge Laws

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