LGBT Employment Nondiscrimination and Capital Structure

Abstract

Workplace equality is an important and integral component of firms’ corporate social responsibility. We argue that firms need to expend substantial resources to mitigate potential LGBT litigation risk or accommodate actual litigation costs, and absorb labor adjustment costs associated with voluntarily adopted or legally imposed LGBT nondiscrimination, leading to a downward adjustment in financial leverage in equilibrium. Consistently, we find a negative association between firms’ Corporate Equality Index scores and financial leverage. To sharpen causality, we use a difference-in-differences design that relies on staggered passages of state LGBT employment nondiscrimination laws. After ensuring exogeneity of these state laws, we show that firms respond to their passages with a reduction in financial leverage. This effect is more pronounced in firms that are labor intensive, prone to mass layoffs, having experienced past LGBT lawsuits, and financially distressed. Affected firms also experience elevated operating leverage and loan spread. We conclude that firms adjust capital structure to accommodate the cost associated with LGBT employment nondiscrimination.