Labour Protection Legislation and Discouraged Borrowers in Europe

We investigate the impact of employment protection regulation on firms’ reluctance to apply for bank finance (loans and overdrafts). Our findings reveal that longer notice periods reduce the likelihood that firms are discouraged from applying for bank finance in the case of blue-collar workers, but they increase it in the case of whitecollar workers. Our interpretation is that, in the case of blue-collar workers, the benefits of extra time to transfer their knowledge and expertise to remaining workers outweigh the cost savings associated with dismissal. However, in the case of white-collar workers, the benefits to firms of dismissing high-cost workers outweigh the risk of losing the knowledge and expertise of employees leaving the firm.Our results are robust to alternative specifications, endogeneity issues, and a battery of robustness tests.