Three papers in corporate finance

Abstract

This thesis includes three empirical studies in corporate finance, each focusing on the theme of either employment protection or trade credit. The first essay, “When Formality Prescribes Informality: Evidence on the Dynamics of Informal Financing Amid Formal Employment Protection Legislation Worldwide”, examines the influence of changes in employment protection legislation (EPL) on supply chain financing across the world. Drawing on the financing advantage theory, this study conjectures that firms increasingly turn to trade credit, extended by their suppliers, as an essential source of informal financing when the financial distress costs increase due to enhanced EPL. Utilizing major labor reforms from 29 countries, this study finds that stringent EPL significantly promotes firms’ reliance on supply chain financing. Critically, the findings further reveal that the relationship operates through a tripartite mechanism centered on labor adjustment costs, suppliers’ comparative advantages over formal intermediaries in supply chain financing and national institutional infrastructure. First, the effect of EPL is more pronounced for firms inherently more severely affected by EPL changes (i.e., labor adjustment costs), including those exhibiting higher labor intensity and labor share, operating in industries with higher workforce turnover, and those in countries with greater union density. Second, the positive relationship is amplified when suppliers possess greater structural comparative advantages over formal financial intermediaries. This encompasses customers with higher financial constraints, greater information asymmetry, less liquidated collaterals, weaker market power, and greater growth potentials, which underscores suppliers’ unique role in supply chain financing. Third, this study shows that the influence of EPL intensifies in countries characterized by more efficient legal enforcement and where demand for informal financing is inherently higher, namely those with less developed financial markets, weaker creditor rights protection, and reduced overall risk and uncertainty.
The second essay, “Dissecting the Influence of Geopolitical Risks on Employment Decisions: The Role of Employment Protection Across Countries”, finds that GPR significantly distorts firms’ labor investment, leading to greater deviations from the optimal level justified by economic fundamentals, i.e., lower labor investment efficiency. This effect is primarily driven by under-investment in labor, reflected in over-firing. The main result is robust across various sensitivity tests and endogeneity concerns. Drawing on real options theory and agency theory, this study further identifies two key mechanisms: the rigidity in labor expense and the financial constraints. Specifically, this study shows that the adverse impact of GPR on efficient labor investment is intensified among firms with high labor adjustment costs and severe financial constraints. Furthermore, this study examines the moderating role of national legal institutions, i.e., EPL, on the relationship between GPR and labor investment inefficiency. The results suggest that stringent EPL, in terms of regulatory stringency and legal enforcement, prompts firms to adopt more conservative employment strategies ex-ante by avoiding excessive workforce in anticipation of geopolitical instability. Finally, this study explores the broader economic consequence by analyzing how the cyclicity of employment growth to GDP growth is conditional on GPR and EPL. The results show that while GPR amplifies the pro-cyclicality of employment, stricter EPL counteracts this effect.
The third essay, “The Use of Cash Flows Metrics in CEO Compensation Contracts and Corporate Trade Credit Provision”, is built on prior research that cash-flow-based performance metrics (CFM) motivates CEO to improve firm’s internal cash flows. This study hypothesizes and finds that the inclusion of CFM in CEO compensation contracts negatively affects firm’s trade credit provision. The findings are consistent with the theory that CFM serve as a disciplinary mechanism to enhance liquidity management and mitigate free-cash-flow agency problems, leading to reduced trade credit provision and tightened credit terms. Specifically, the use of CFM is associated with lower share of goods sold on credit and shorter collection period. These findings remain robust after we account for endogeneity. Furthermore, the effect is more pronounced for firms with high cash flow uncertainty and severe liquidity risks, in terms of customer concentration, segment diversification, and financial constraints, suggesting that CFM make CEO more prudent in redistributing liquidity when firms are exposed to significant cash flow uncertainty.

Date of Award	15 Nov 2025
Original language	English
Awarding Institution	University of Nottingham
Supervisor	Zhangfan Cao (Supervisor), Cherry Yi Zhang (Supervisor) & Xiaolan Zheng (Supervisor)