Labor litigation and corporate cash holdings: Insights from the textual analysis of judicial documents

Labor litigation involves disputes between a firm and its employees over the latter's rights and obligations, and it may increase the uncertainty of firms' business operations and thus affect their financial decisions. Using textual analysis of judicial documents on labor and personnel disputes obtained from a specialized dataset, we find that labor litigation prompts firms to increase their cash holdings. Further analysis indicates that this effect mainly occurs in firms with higher labor adjustment costs, in regions where labor regulations and labor protection are strongly enforced, and in firms with high corporate social responsibility and high financial constraints. Finally, we find that increasing corporate cash holdings after labor litigation improves both firm performance and the market value of cash. •We investigate the impact of labor lawsuits on the cash holdings of listed firms.•Firms will increase cash holdings with the rise in litigation cases and when they are named as defendants.•Firms increase cash holdings to alleviate the pressure of labor adjustment costs and reduce uncertainty in future operations.•Corporate cash holdings after labor litigation improve both firm performance and the market value of cash.