Empirical Essays on Labor Regulation, Geopolitical Shocks, and Investment

This thesis consists of three self-contained yet interrelated empirical essays in corporate finance. The first and third essays examine the impact of Right-to-Work (RTW) laws on investment, focusing on venture capital (VC) and artificial intelligence (AI), respectively, while the second analyzes the determinants of corporate divestment from Russia. Together, these essays explore how institutional and geopolitical shocks shape corporate investment decisions, offering a unified perspective on the interaction between external environments and firm behavior.

In the first essay, we contribute to the growing literature on RTW laws and their influence on state-level VC investment. Employing a difference-in-differences strategy, we find that the passage of RTW laws increases VC investment. These results are robust to concerns about omitted variable bias, reverse causality, and unobserved local economic conditions. The positive effect of RTW laws on VC investment is particularly pronounced in highly unionized and technologically advanced states.

The second essay examines the determinants of corporate divestment from Russia using a unique dataset of divestment decisions of firms operating in Russia. We find that larger firms with higher sales in Russia as well as higher cash reserves and leverage, are more likely to divest from Russia. Additionally, firms with high Environmental, Social, and Governance (ESG) scores and substantial advertising expenditures (for U.S. firms only) exhibit a greater propensity to exit the Russian market. Our causal evidence is economically important, with elasticities for Firm Size, Russian sales, Cash, Leverage, and Social ESG score at 2.413, 0.468, 0.352, 0.477, and 0.962 which indicates that a 1% increase in these variables increases the probability of exiting Russia by 2.431%, 0.468%, 0.352%, 0.477% and 0.962%, respectively.

The third essay uses a difference-in-differences approach to explore how right-to-work (RTW) laws influence firm investment in artificial intelligence (AI). We find that firms headquartered in RTW laws states invest less in AI. Investigating employee wages as a potential mechanism, we find that RTW laws lead to lower wages. Our results remain robust across multiple specifications, including an alternative AI investment measure, a stacked difference-in-differences framework, falsification tests, dynamic treatment effects, and a control group limited to neighboring states. The negative effect of RTW laws on AI investment persists when focusing exclusively on IT firms and when analyzing AI investment growth.