The Speed of Corporate Cash Adjustment: Evidence From Labor Protection Laws

ABSTRACT This study examines how labor protection affects the dynamics of corporate cash policy. Using the staggered adoption of U.S. state‐level wrongful discharge laws, we find that stronger labor protection reduces the speed of cash adjustment by 16.7%. The effect is asymmetric, concentrated among cash‐rich firms, and more pronounced for firms with weak governance, tighter financial constraints, and higher distress risk. We also find that the profitability losses associated with suboptimal cash holdings intensify following adoption. Our findings show that labor protection affects how efficiently firms manage cash, revealing a distinct channel that is less visible when studying cash levels alone.