Employment Protection and Bank Dividends: Evidence From Wrongful Discharge Laws

ABSTRACT Using the staggered adoption of the good faith exception to U.S. wrongful discharge laws, we examine the causal effect of employment protection and firing costs on bank dividend payouts. We find stronger employment protection significantly reduces dividends, with good faith adoption lowering payouts by 7% relative to the mean. In line with the operational leverage hypothesis, cross‐sectional tests show this effect is concentrated among banks with higher labour costs and greater financial leverage. Overall, our results document how employment conditions influence bank dividend payouts and shape the allocation of corporate value among shareholders and employees.