Stakeholder Corporate Governance: The Combined Effects of Bank Competition and Employment Protection

Between the early-1970s and the mid-1990s, the U.S. banking sector was deregulated and U.S. workers gained more statuary basic protections. The effects of these two reforms on productive activity have largely been studied separately in the finance and labor literatures. Yet they only have separable impacts under classical production theories, abstracting from frictions and the roles of various stakeholders in corporate governance (e.g., related to bargaining between workers, creditors, and shareholders). Jointly estimating effects, we confirm that bank branch deregulation benefits industries highly dependent on external finance. Employment protection promotes knowledge-intensive industries, consistent with labor search theories with firm-specific investment, but not with neo-classical theories and many empirical studies. Importantly, we find interactions between the two reforms to matter for real economic activity, suggesting stakeholder corporate governance to be important.