Employment stability and corporate cash holdings

ABSTRACT

This paper investigates how a firm’s employment stability affects the level of its cash holdings. We find that firms with high employment stability (as measured by one minus a firm’s employment elasticity with respect to its sales) maintain large cash holdings. The positive effect of employment stability on cash holdings is stronger for R&D intensive firms and firms with high firm-specific human capital. These results are consistent with theories predicting that firms hold cash to signal the credibility of their employment policies regarding job security.

KEYWORDS:

• Cash holdings
• employment stability
• job security
• implicit contract

JEL CLASSIFICATION:

• G32
• G33
• M51

Disclosure statement

No potential conflict of interest was reported by the authors.