Do Wrongful‐Discharge Laws Impair Firm Performance?

Abstract

We estimate the effects on firm costs and profitability of wrongful‐discharge protections adopted by U.S. state courts during 1977–99. By examining the data of approximately 18,000 commercial banks, after controlling for local state economic conditions, we find evidence of a relationship between the adoption of the implied contract exception and the increase in labor expenses. In addition, adoption of the implied contract exception is found to have a significant and negative effect on overall profitability. The study corroborates previous findings that wrongful‐discharge laws place increased costs on employers.