Wrongful Discharge Laws and Asymmetric Cost Behavior

Abstract

Exploiting the natural experiment created by the adoption of wrongful discharge laws (WDLs)
across U.S. states, we examine the effect of legal protection against unjust employment
termination on firm-level cost behavior. We find that the adoption of WDLs increases the
asymmetric sensitivity of costs to activity (i.e., cost stickiness). The effect of WDLs on cost
stickiness varies across firms and industries, as well as by adoption timing and multiplicity. Our
evidence suggests that changes in the state-level legal environment have a significant effect on
firm-level resource adjustment decisions and asymmetric cost behavior.