This paper investigates how a firm's employment stability affects the level of its cash holdings. We find that firms with high employment stability (as measured by one minus a firm's employment elasticity with respect to its sales) maintain large cash holdings. The positive effect of employment stability on cash holdings is stronger for R&D intensive firms and firms with high firm-specific human capital. These results are consistent with theories predicting that firms hold cash to signal the credibility of their employment policies regarding job security.
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- Cash holdings
- employment stability
- implicit contract
- job security