Hostname: page-component-89b8bd64d-4ws75 Total loading time: 0 Render date: 2026-05-10T13:00:25.395Z Has data issue: false hasContentIssue false
  • English
  • Français

Alternative Work Arrangements and Cost of Equity: Evidence from a Quasi-Natural Experiment

Published online by Cambridge University Press:  22 May 2020

Atsushi Chino Open the ORCID record for Atsushi Chino [Opens in a new window]
Atsushi Chino*
Affiliation:
Chino, achino@nagasaki-u.ac.jp, Nagasaki University Department of Economics
*
Chino, (corresponding author), achino@nagasaki-u.ac.jp
Get access Rights & Permissions [Opens in a new window]

Abstract

I examine whether firms’ use of alternative work arrangements, particularly temporary agency workers, affects their cost of equity. Exploiting a major labor-market deregulation in Japan that induced manufacturing firms to increase their employment of temporary agency workers, I show that the cost of equity decreased in manufacturing firms, relative to nonmanufacturing firms, after the deregulation. Further analysis using variations within manufacturing firms provides corroborating evidence. The rigidity in labor expenses and the cost of debt also decreased in manufacturing firms. Overall, alternative work arrangements increase the flexibility in labor costs, leading to lower operating leverage and cost of capital.

Information

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 56 , Issue 2 , March 2021 , pp. 569 - 606
Copyright
© Michael G. Foster School of Business, University of Washington 2020

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Article purchase

Temporarily unavailable

Footnotes

I am especially grateful to Xiaoji Lin (the referee), whose comments substantially improved the article. I also appreciate helpful comments from David Denis, Yuichi Fukuta, Takato Hiraki (discussant), Paul Malatesta (the editor), Dev Mishra (discussant), Hiroshi Morita, Hidenori Takahashi, Mengying Wang (discussant), and Kazuo Yamada; seminar participants at the Nagoya University, the Ritsumeikan University, and the Yokohama National University; and conference participants at the 2016 Nippon Finance Association Meeting, the 2018 Asian Finance Association Meeting, and the 2018 Financial Management Association Meeting. I acknowledge financial support from the Japan Society for the Promotion of Science (JSPS KAKENHI Grant JP17K03821). All errors are my own.

References

Abraham, K., and Taylor, S.. “Firms’ Use of Outside Contractors: Theory and Evidence.” Journal of Labor Economics, 14 (1996), 394–424.Google Scholar
Acharya, V.; Baghai, R.; and Subramanian, K.. “Wrongful Discharge Laws and Innovation.” Review of Financial Studies, 27 (2013), 301–346.Google Scholar
Agrawal, A., and Matsa, D.. “Labor Unemployment Risk and Corporate Financing Decisions.” Journal of Financial Economics, 108 (2013), 449–470.Google Scholar
Alimov, A. “Labor Protection Laws and Bank Loan Contracting.” Journal of Law and Economics, 58 (2015), 37–74.Google Scholar
Autor, D. “Outsourcing at Will: The Contribution of Unjust Dismissal Doctrine to the Growth of Employment Outsourcing.” Journal of Labor Economics, 21 (2003), 1–42.Google Scholar
Belo, F.; Lin, X.; and Bazdresch, S.. “Labor Hiring, Investment, and Stock Return Predictability in the Cross Section.” Journal of Political Economy, 122 (2014), 129–177.Google Scholar
Belo, F.; Lin, X.; Li, J.; and Zhao, X.. “Labor-Force Heterogeneity and Asset Prices: The Importance of Skilled Labor.” Review of Financial Studies, 30 (2017), 3669–3709.Google Scholar
Bertrand, M., and Mullainathan, S.. “Enjoying the Quiet Life? Corporate Governance and Managerial Preferences.” Journal of Political Economy, 111 (2003), 1043–1075.Google Scholar
Campello, M.; Gao, J.; Qiu, J.; and Zhang, Y.. “Bankruptcy and the Cost of Organized Labor: Evidence from Union Elections.” Review of Financial Studies, 31 (2018), 980–1013.Google Scholar
Cappelli, P., and Keller, J.. “A Study of the Extent and Potential Causes of Alternative Employment Arrangements.” ILR Review, 66 (2013), 874–901.Google Scholar
Carlson, M.; Fisher, A.; and Giammarino, R.. “Corporate Investment and Asset Price Dynamics: Implications for the Cross-Section of Returns.” Journal of Finance, 59 (2004), 2577–2603.Google Scholar
Chen, H.; Kacperczyk, M.; and Ortiz-Molina, H.. “Labor Unions, Operating Flexibility, and the Cost of Equity.” Journal of Financial and Quantitative Analysis, 46 (2011), 25–58.Google Scholar
Claus, J., and Thomas, J.. “Equity Premia as Low as Three Percent? Evidence from Analysts’ Earnings Forecasts for Domestic and International Stock Markets.” Journal of Finance, 56 (2001), 1629–1666.Google Scholar
Dessaint, O.; Golubov, A.; and Volpin, P.. “Employment Protection and Takeovers.” Journal of Financial Economics, 125 (2017), 369–388.Google Scholar
Dhaliwal, D.; Judd, J. S.; Serfling, M.; and Shaikh, S.. “Customer Concentration Risk and the Cost of Equity Capital.” Journal of Accounting and Economics, 61 (2016), 23–48.Google Scholar
Donangelo, A. “Labor Mobility: Implications for Asset Pricing.” Journal of Finance, 69 (2014), 1321–1346.Google Scholar
Donangelo, A.; Gourio, F.; Kehrig, M.; and Palacios, M.. “The Cross-Section of Labor Leverage and Equity Returns.” Journal of Financial Economics, 132 (2019), 497–518.Google Scholar
Easton, P. “PE Ratios, PEG Ratios, and Estimating the Implied Expected Rate of Return on Equity Capital.” Accounting Review, 79 (2004), 73–95.Google Scholar
Eisfeldt, A., and Papanikolaou, D.. “Organization Capital and the Cross-Section of Expected Returns.” Journal of Finance, 68 (2013), 1365–1406.Google Scholar
Fama, E., and French, K.. “Common Risk Factors in the Returns on Stocks and Bonds.” Journal of Financial Economics, 33 (1993), 3–56.Google Scholar
Favilukis, J., and Lin, X.. “Does Wage Rigidity Make Firms Riskier? Evidence from Long-Horizon Return Predictability.” Journal of Monetary Economics, 78 (2016a), 80–95.Google Scholar
Favilukis, J., and Lin, X.. “Wage Rigidity: A Quantitative Solution to Several Asset Pricing Puzzles.” Review of Financial Studies, 29 (2016b), 148–192.Google Scholar
Favilukis, J.; Lin, X.; and Zhao, X.. “The Elephant in the Room: The Impact of Labor Obligations on Credit Risk.” American Economic Review, forthcoming (2020).Google Scholar
Gebhardt, R.; Lee, M.; and Swaminathan, B.. “Toward an Implied Cost of Capital.” Journal of Accounting Research, 39 (2001), 135–176.Google Scholar
Gordon, J., and Gordon, M.. “The Finite Horizon Expected Return Model.” Financial Analyst Journal, 53 (1997), 52–61.Google Scholar
Gu, L.; Hackbarth, D.; and Johnson, T.. “Inflexibility and Stock Returns.” Review of Financial Studies, 31 (2018), 278–321.Google Scholar
Hainmueller, J., and Xu, Y.. “Ebalance: A Stata Package for Entropy Balancing.” Journal of Statistical Software, 54 (2013), 1–18.Google Scholar
Hou, K.; Van Dijk, A.; and Zhang, Y.. “The Implied Cost of Capital: A New Approach.” Journal of Accounting and Economics, 53 (2012), 504–526.Google Scholar
Houseman, S. “Why Employers Use Flexible Staffing Arrangements: Evidence from an Establishment Survey.” ILR Review, 55 (2001), 149–170.Google Scholar
Huang, Q.; Jiang, F.; Lie, E.; and Que, T.. “The Effect of Labor Unions on CEO Compensation.” Journal of Financial and Quantitative Analysis, 52 (2017), 553–582.Google Scholar
Jacob, M.; Michaely, R.; and Müller, M. A.. “Consumption Taxes and Corporate Investment.” Review of Financial Studies, 32 (2019), 3144–3182.Google Scholar
John, K.; Knyazeva, A.; and Knyazeva, D.. “Employee Rights and Acquisitions.” Journal of Financial Economics, 118 (2015), 49–69.Google Scholar
Katz, L., and Krueger, A.. “The Rise and Nature of Alternative Work Arrangements in the United States, 1995–2015.” Working Paper w22667, National Bureau of Economic Research (2016).Google Scholar
Katz, L., and Krueger, A.. “Understanding Trends in Alternative Work Arrangements in the United States.” Working Paper w25425, National Bureau of Economic Research (2019).Google Scholar
Klasa, S.; Maxwell, W.; and Ortiz-Molina, H.. “The Strategic Use of Corporate Cash Holdings in Collective Bargaining with Labor Unions.” Journal of Financial Economics, 92 (2009), 421–442.Google Scholar
Kuehn, L. A.; Simutin, M.; and Wang, J.. “A Labor Capital Asset Pricing Model.” Journal of Finance, 72 (2017), 2131–2178.Google Scholar
Kuroki, M. “The Deregulation of Temporary Employment and Workers’ Perceptions of Job Insecurity.” ILR Review, 65 (2012), 560–577.Google Scholar
Kuzmina, O. “Employment Flexibility and Capital Structure: Evidence from a Natural Experiment.” Working Paper, New Economic School (2018).Google Scholar
Mandelker, G., and Rhee, G.. “The Impact of the Degrees of Operating and Financial Leverage on Systematic Risk of Common Stock.” Journal of Financial and Quantitative Analysis, 19 (1984), 45–57.Google Scholar
Matsa, D. “Capital Structure as a Strategic Variable: Evidence from Collective Bargaining.” Journal of Finance, 65 (2010), 1197–1232.Google Scholar
Novy-Marx, R. “Operating Leverage.” Review of Finance, 15 (2011), 103–134.Google Scholar
Organization for Economic Cooperation and Development. OECD Employment Outlook. Paris, France: OECD Publishing (2014).Google Scholar
Ohlson, J., and Juettner-Nauroth, B.. “Expected EPS and EPS Growth as Determinants of Value.” Review of Accounting Studies, 10 (2005), 349–365.Google Scholar
Ono, Y., and Sullivan, D.. “Manufacturing Plants’ Use of Temporary Workers: An Analysis Using Census Microdata.” Industrial Relations: A Journal of Economy and Society, 52 (2013), 419–443.Google Scholar
Roberts, M., and Whited, T.. “Endogeneity in Empirical Corporate Finance.” In Handbook of the Economics of Finance, Vol. 2A, Constantinides, G., Harris, M., and Stulz, R., eds. Amsterdam, Netherlands: North Holland (2013).Google Scholar
Schmalz, M. “Unionization, Cash, and Leverage” Working Paper, University of Michigan (2015).Google Scholar
Segal, L., and Sullivan, D.. “The Growth of Temporary Services Work.” Journal of Economic Perspectives, 11 (1997), 117–136.Google Scholar
Serfling, M. “Firing Costs and Capital Structure Decisions.” Journal of Finance, 71 (2016), 2239–2286.Google Scholar
Simintzi, E.; Vig, V.; and Volpin, P.. “Labor Protection and Leverage.” Review of Financial Studies, 28 (2015), 561–591.Google Scholar
Sugeno, K., and Yamakoshi, K.. “Dismissals in Japan Part One: How Strict Is Japanese Law on Employers?” Japan Labor Review, 11 (2014), 83–92.Google Scholar
Supplementary material: File

Chino Supplementary Materials

Chino Supplementary Materials

Download Chino Supplementary Materials(File)
File 250.1 KB