Nonregular Employment and Payout Policy: Evidence from the Massachusetts Independent Contractor Law

Abstract

Compared with regular employees, independent contractors (ICs) offer labor flexibility and cost savings to their employers. Using a difference-in-differences design around the 2004 Massachusetts law that discourages IC usage, we find that this exogenous decrease in IC usage makes treated firms’ earnings more sensitive to changes in sales, increases labor-related expenses, and reduces profitability. Firms subsequently reduce share repurchases. The decrease is more pronounced for firms with high operating leverage and financial constraints. Our results are robust to entropy balancing. We conclude that IC usage affects firms’ operating leverage and profitability, which in turn, influence payout policy. This paper was accepted by Victoria Ivashina, finance. Supplemental Material: The data files and online appendix are available at https://doi.org/10.1287/mnsc.2022.00103 .