Temporary Workers and Cash Holdings

We investigate the effect of firm reliance on temporary workers on cash holdings by exploiting the quasi-natural experiment created by a temporary worker protection law in South Korea which requires firms to change a worker’s status to full-time once the worker has been employed at the firm for two years. Although the law passage increases the rigidity of labor costs, firms that relied more on temporary workers prior to the law strategically lower their cash holdings afterward. This occurs because the law passage raises the likelihood that workers not belonging to a union become union members. The negative effect of the law on cash holdings is driven by firms for whom lower cash holdings provide more credible evidence that a firm is unable to concede to union demands and by firms with lower ex-ante operating leverage. The stock prices of unionized firms which rely more on temporary workers react negatively to the law passage and stock market participants value cash holdings less highly for these firms. Lastly, we show that low cash holdings and using subcontracting are complement mechanisms that firms in South Korea use to decrease union bargaining power.