Labor Unemployment Insurance and Firms' Future Performance

Abstract

Labor unemployment insurance has been an ongoing topic in economics and finance. Recent studies in accounting and finance have examined the effect of labor unemployment insurance on earnings management (Dou, Khan, and Zou 2016), corporate voluntary disclosure (Ji and Tan 2016), and corporate financial structure (Agrawal and Matsa 2013). This paper investigates the association between unemployment insurance benefits and firms’ future performance. We find that higher unemployment benefits are associated with higher firms’ future earnings and cash flows. Furthermore, we examine how unemployment benefits affect the volatility of firms’ future performance. We find that the magnitude of unemployment benefits is associated with a lower degree of volatility of firms’ future earnings and cash flows, suggesting that the risk mitigation effect of unemployment insurance helps to explain the positive relationship between unemployment insurance and firms’ future performance. Finally, we find that the positive association between unemployment benefits and firms’ future performance is more pronounced for firms with larger changes in labor force, and that the negative association between unemployment benefits and volatility of firms’ future performance is more pronounced for firms with higher labor force volatility and capital structure volatility. Overall, our results suggest that labor unemployment insurance has a strong association with firms’ future performance and volatility of firms’ future performance.