Employment Protection and Venture Capital Investment: The Impact of Wrongful Discharge Laws

Author:

Wang Wei1,Yung Chris2ORCID

Affiliation:

1. Monte Ahuja College of Business, Cleveland State University, Cleveland, Ohio 44114;

2. McIntire School of Commerce, University of Virginia, Charlottesville, Virginia 22904

Abstract

Wrongful discharge laws (WDLs) provide limits to the employment-at-will doctrine, and thus impair operating flexibility, increasing expected financial distress costs by making it costly to fire employees. This impairment is detrimental to start-ups, leading to a decline in venture capital (VC) investment. Using a difference-in-differences framework enabled by the staggered adoption of WDLs across the U.S. states, we show VC investment declines after a state adopts the good faith exception (the strongest form of WDL). This decline is most pronounced in sectors with high labor dependency. This paper was accepted by Victoria Ivashina, finance. Supplemental Material: The data files are available at https://doi.org/10.1287/mnsc.2023.01936 .

Publisher

Institute for Operations Research and the Management Sciences (INFORMS)

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