This paper examines the empirical link between severance pay and corporate finance.
Severance pay is an economic debt of the employer and hence should be taken into account
by the market in its assessments of risk. Using a hand collected dataset of accounting data
from Italy and Austria we find there is only a limited relationship between severance pay and
market risk indicators. This suggests that arguments that severance pay systems destroy
corporate value may need to be reassessed.
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