Employment protection and share repurchases: Evidence from wrongful discharge laws

We use the staggered adoption of Wrongful Discharge Laws (WDLs) by U.S. state courts as a quasi-natural experiment to examine the causal impact of firing costs and employment protection on corporate payouts. We find that the greater employment protection imposed by WDLs leads to higher share repurchases, and that this finding is more pronounced among firms with greater financial resources and better governance. Our results support the argument that as higher firing costs enhance employee entrenchment and encourage rent extraction behavior, firms have an incentive to increase share buybacks to mitigate a wealth transfer from shareholders to employees. •Firms facing increased firing costs and employment protection have higher share repurchases.•We establish this causal link by exploiting the adoption of Wrongful Discharge Laws in the US.•Our finding is more pronounced among firms with greater financial resources and better governance.•Firms increase share buybacks to mitigate rent extraction behavior by better protected employees.