Unemployment insurance and cash holdings of privately held firms around the world

Abstract

AbstractResearch Question/IssueThis paper studies the relationship between country‐level unemployment insurance and cash holdings of privately held firms. When public unemployment insurance is weak, firms may provide alternative unemployment insurance by committing not to lay off workers in bad times. We hypothesize that one way firms can do so is by holding larger cash balances.Research Findings/InsightsUsing a large sample covering 388,940 private firms from 32 countries around the world over the 2007–2014 period, we find a negative relationship between public unemployment insurance and cash holdings. This effect is driven by countries where public unemployment insurance is weak or nonexistent. We also find that privately held firms keep a larger part of their new debt issues as cash when public unemployment insurance is weak.Theoretical/Academic ImplicationsWe contribute to a growing literature on an institution‐based view of comparative corporate governance. We show that national governance factors and, more specifically, public unemployment insurance, which protects employees (an important but relatively ignored stakeholder), influences firm cash holdings in a private firm context.Practitioner/Policy ImplicationsOur findings have important implications for policy design. Specifically, they suggest that labor market institutions designed to support employees can also indirectly benefit their employers because these institutions allow firms to reduce the opportunity cost related to holding larger cash balances.